Martin Kronicle

The new SEC Short Selling rule will kick into effect when a stock has fallen 10% or more in one day. Studies have shown that putting restrictions on short selling actually causes more volatility, but I don’t think politicians worry about that as much as they need to look like they’re doing something.

From The Economist: (bold is mine)

Despite being a compromise, the new rule is controversial within the SEC. Two of the five commissioners voted against it. One of the dissenters, Kathleen Casey, complained that the move was guided “less by empirical analysis and more by public relations” and that “we should resist the urge to act merely to say we have acted.”

Some will see this as a reference to the huge political pressure the commission has faced to crack down on short-sellers, while others will see it as a dig at Mary Schapiro, the commission’s newish chairman. Ms Schapiro has spent her first year in the job trying to rush through a bunch of new initiatives to counter criticism that the SEC lacks spine.

The NYT’s Floyd Norris reported Mary Schapiro as saying “the rule would force short-sellers to stand in the back of the line, unable to sell shares until all actual owners who wanted to sell had been able to do so.”

Now that has to be the most stupid thing she could have said. Why the preferential treatment? That takes the spirit of competition right out of the market. Short selling is as American as buying long. Furthermore, short selling is more of a trade than an investment.

This rule, as it’s written, only strengthens and substantiates the institutional, long-only mindset that must have been lobbied for by the mutual fund industry. This is not a good thing.

Even if the SEC had evidence that there was manipulative short selling (they already have handled naked shorting) and long-only investors invest for the long-term, why would it be necessary to annul short selling on an intraday basis?

#1. Don’t go home short gamma.

Funny Wall St. Journal article article by James Altucher, too bad VN didn’t follow his pupil’s lessons – specifically #8 below.

Victor Niederhoffer blew up a few times by being short gamma. He mustn’t have tested that ethos despite how smart he is, and I’m not being sarcastic.

I have nothing against Victor Niederhoffer personally, but his book The Education of a Speculator has to be the second-worst book I’ve read after Liar’s Poker.

Popular? – Yes, both are.

Classics? – Not in my paradigm.

The upside to all of this is that I did incorporate a new rule to my book-buying system: never buy a hardcover without having read a good portion of it first at the bookstore (now a free chapter on the Kindle). So for that, I have to thank Victor Niederhoffer.

The best book to understand the Greeks (such as Gamma) would be Tony Saliba’s Option Spread Trading Strategies: Trading Up, Down, and Sideways Markets.

Listen to my Tony Saliba pocast interview.

From the WSJ article (I don’t pay for news fyi):

8.) Always Protect the Downside.

This is learned by negative example. As Nassim Taleb has pointed out ad nauseum, Black Swans occur. (See the Malcolm Gladwell article on Taleb to see Taleb’s thoughts on Victor.) No matter how much you test, there will be a “this time is different” moment that will force your bank account into oblivion. I trade a strategy based on selling puts and calls at levels where my software thinks its statistically unlikely the market hits those levels before the next options expirations day. But I also use some of the premium I earned from selling those puts and calls to buy slightly further out puts and calls as insurance the market doesn’t run away from me. No matter how confident the software is, always protect.

I live in Los Angeles, so naturally I’ve been reading a lot about California and it’s own economic crisis. We are in a very similar situation to what the US is in.

Like the US as a whole, we have a large economy, a horrible state senate and assembly, an incompetent leader, taxes out the wazoo, and we happen to be in the forefront of immigration and health care issues. Worst of all, Los Angeles and the state at large, are not business friendly in the least.

I’ve been reading about the potential collapse in Greece too, and have blogged about that recently in a post called Greece and California Death Match, which was a bit of a play on words.

Greece has no Treasury of its own. California issues IOUs. S&P downgraded California’s credit rating from AA to AA- which means that the issuance of new debt – debt that we need – will cost more and add to user fees and taxes, depending on the type of debt issued.

Jamie Dimon recently commented on Greece and California in Barron’s and I thought his words were more in line with mine about what would happen with California’s debt service.

The NYT Magazine ran an article Sunday about Harry Markopolos, the Madoff whistle blower called Math Is Hard.

According to the article, Markopolos discusses what’s wrong with the SEC – it’s the attorneys and their way of thinking.

That got me thinking about how horrible Chuck Prince did at running Citi. Insight from Markopolos and the Chuck Prince meltdown might provide for an interesting case study in why you’d want a very successful trader – someone with excellent skills at risk management – to run a large trading firm as well as a regulatory body and exchanges.

From the NYT Magazine:

Are you saying the S.E.C. under Schapiro is about to catch fraud on Wall Street?

She has the wrong staff. They’re a bunch of idiots there.

What do you mean?

The five commissioners of the S.E.C. are securities lawyers. Securities lawyers never understand finance. They don’t have the math background. If you can’t do math and if you can’t take apart the investment products of the 21st century backward and forward and put them together in your sleep, you’ll never find the frauds on Wall Street.