Our Federal Government has taken unprecedented action in the last two days purportedly with our benefit in mind though in both cases the action defies logic, reason and does not seem to be based on any fundamental evidence.
Yesterday Congress passed an amended version of The Commodity Markets Transparency and Accountability Act of 2008, which aims to prevent manipulation and excessive speculation in energy markets.
They did this despite and exhaustive and comprehensive report from the Commodity Futures Trading Commission, released less than a week earlier that disputes the fundamental premise of the bill.
As noted here earlier, some in Congress had come to the conclusion that speculators were the cause of higher energy prices and no amount of research or conflicting market activity would move them from that position, at least as long as there was an election to win, blame to be placed and responsibility to be avoided.
Today the Securities and Exchange Commission (SEC) issued an order restricting short selling on 799 financial companies affective immediately. While the order provided an exemption for option market makers for today’s options expiration, it did not include a general exemption for market makers as had previous emergency orders restricting naked short selling.
That means comes Monday morning, without a sudden outbreak of common sense in Washington DC, you can expect much wider bid/ask spreads in equity options assuming option market makers will be willing to provide one.
The SEC goes back to the old kinard that short sellers are somehow responsible for the 14-month subprime debacle, resultant credit liquidity crisis and insolvency issues of the world’s investment banks. No one is denying that we are in the midst of a crisis yet the Dow Jones Industrial Average has rallied more than 1,000 in less that 24 hours from noon on Thursday to noon on Friday. Talk about manipulation! I guess there are good and bad types of manipulation.
Both Wayne Luthringhausen of the Options Clearing Corporation (OCC) and William Brodsky of the Chicago Board Options Exchange have released sharply worded statements criticizing the SEC for not exempting market makers.
Ron Ianieri, chief market strategist for Options University, says the SEC’s action “will open up a floodgate of illiquidity.”
He also says that fewer people will enter the market if they know that they will not be able to affordably hedge their position and adds that without shorts in the market the eventual sell-off will be much more dangerous as there will be no shorts to take profits.
Ianieri points out that the short sellers did not cause the problem. “All the short sellers did was see an opportunity because these guys were losing money and over leveraged in vehicles that never should have been created in the first place. They are trying to blame the guys who dug the grave for the murder.”
Tags: CFTC, Congress, short sellers, speculators
