Comments on: Hedge Funds Taking Pain From Government-Orchestrated Squeeze of Financial Shorts

By: fink2ice

fink2ice — Sat, 20 Sep 2008 19:53:00 +0000

In 1938, the SEC adopted the uptick rule, more formally known as Rule 10a-1.

The rule was put in place after short sellers were blamed for the Wall Street Crask of 1929. It was supposed to prevent "short attacks" and price manipulation. However last year, the SEC thought it would experiment with if there rule was effective at all.

And, to experiment, the SEC eliminated the rule.

It's high-time they re-establish this rule. To little, to late for some but all is not lost.

By: Dave Raithel

Dave Raithel — Sat, 20 Sep 2008 19:27:00 +0000

I want to juxtapose Yves Smith’s assertion above that “the investors targeted, mainly hedge funds, often use leverage supplied by their friendly prime broker (Goldman and Morgan Stanley are far and away the biggest in that business)” against Willem Buiter’s suggestion in his column yesterday (Fear and Loathing in the Financial Markets) that the prohibition is due to “the collapse in the share price of a number of politically well-connected banks and other financial institutions …”

… So would it have been possible for a hedge manager to borrow money from the fund’s prime broker and then short that broker’s stock? (Since transparency is not the rule of the day …) And if shorting is funded (at least in part) by financial institutions, might the practice be stymied or curtailed if finance were not forthcoming? On the other-hand, politically well-connected finance institutions benefited from the practice by which OTHER (it would have to be?) politically well-connected institutions were harmed.

Is the game to trash your competitor and do marginally better than a pyrrhic victory? (The last one standing doesn’t fall but is propped up on the fallen.)

I can’t see the trees, I see nothing but forest; so I don’t see ANY move by anybody that doesn’t require making somebody else worse off and that in turn, disposing some facet of the finance scheme toward a downward spiral…And I don’t even claim that I present a coherent thesis. I only claim to make honest (as best I can not being fluent in the lingua franca) observations.

By: Matthew Dubuque

Matthew Dubuque — Sat, 20 Sep 2008 15:13:00 +0000

Matthew Dubuque

95% of those who trade in options lose money.

Coincidentally, those 95% who lose money ALL think they are smarter than everyone else.

What never ceases to amaze me is that I have NEVER met a retail options speculator who knew the formula for how to calculate the THETA of an option.

The ones who shout the loudest about how much they know about deltas and gammas don't even know what the THETA represents. It's EASILY the most important Greek.

Amazing.

As we used to say on the floor, while laughing, "Let them eat premium!".

And of course Black-Scholes, Merton and Cox-Rubinstein ALL assume a Gaussian distribution of prices.

My, my. People think that one year of calculus makes them a mathematician.

Tragic, yes?

Matthew Dubuque

By: Anonymous

Anonymous — Sat, 20 Sep 2008 13:30:00 +0000

The first “gain” above should be “pain”.

By: Anonymous

Anonymous — Sat, 20 Sep 2008 13:28:00 +0000

Another options trader here with a couple of points.
Molcool: you suggest the market found 1250 at expiration because that’s where most of the contracts were written. I would have thought it found 1250 because most of the contracts were written out there on the wings, so by bringing the market back to 1250 the buyers of those options experienced the maximum gain. Thus producing the maximum gain to those who wrote those contracts; namely the boys who have been given a green light for collusive manipulation of the market fully supported by Fed and Treasury. Hence the move back to 1250.

Second, I’ve been very pleased with the results of non-directional strategies the last month. Credit spreads out there on the wings seem to take advantage of the one sure thing in the markets (fluctuation) and also have the benefit of aligning my positions with the interests of the boys as expiration approaches.

By: Anonymous

Anonymous — Sat, 20 Sep 2008 09:52:00 +0000

“Let [the stock market] gap, boys and girls, and then see who has the power. Don’t like their rules?: don’t play, and see how they like them vectors.”

Yes indeed. Paulson/Bernanke are increasing political risk that the US government will destroy investments through taxes and inflation. The market will sell off because of this increased tax and inflation risk. The rally is just a suckers rally. If the government printed enough money to try to prop up the entire stock market, there’d be a run on the dollar, and all currencies pegged to it.

By: Richard Kline

Richard Kline — Sat, 20 Sep 2008 08:18:00 +0000

No all y’all trader jos out there are of the rugged individualist persuasion, so I ’spect you’ll take your lumps. If y’all were more of a, er, _collectivist_ minded sort I’d suggest mass non-cooperation by no-bid on SEC-frozen financial stocks come Monday. Let it gap, boys and girls, and then see who has the power. Don’t like their rules?: don’t play, and see how they like them vectors.

By: Cash Mundy

Cash Mundy — Sat, 20 Sep 2008 05:10:00 +0000

Ol' Cash sure got whacked yesterday and today too. Why, SKF couldn't even trade for a while, and SRS really dumped. And we won't even get into the puts on politically-connected investment banks and such.
It's amazing how they can do that, just change the rules and take a bunch of money from evil shorts like Cash and Molcool and give it to them Wall Street boys. It's just like magic or something, and Cash agrees it sends a message:

Wall Street Boys
Market Cap: Trillions of Dollars
Political Connections: Priceless
have a posse

OBEY!

By: Molcool

Molcool — Sat, 20 Sep 2008 04:32:00 +0000

As an avid option trader (who lost a large amount of coin in the last 24 hours) I can assure you that the timing of this action was perfectly calculated and timed to bail out investment banks and brokers who bet on the upside or against the downside in derivatives. Didn’t you know? Friday was a “quadruple witching” expiration day for equity options, index options, index futures and single-stock futures. The Wall Street firms who were choking on their derivatives positions at 1:00pm yesterday got bailed out with a 1000-point rally in 3 hour, and they were able to take billions of Dollars away from people who had bet against them. The close today wat 1250 is conveniently right at the medium price range for July and August, where most of the contracts were probably written.

Nevertheless, this was not about the money, this was about sending a message.