Friday, September 19, 2008

Cox and the Law of Unintended Consequences

So Chris Cox, chair of the SEC, is doing his best to prop up financials. That gives me a warm and fuzzy feeling in my gut.

The only problem: He is freezing out the options market. From Worldwide:
SEC staff will recommend commissioners approve a rule to grant a permanent exemption [to the no-shorting rule], the agency said in statement today. Options market makers would have been prohibited from making short sales starting next week under the ban adopted today to keep speculators from driving down stock prices.

Without the change, the $1.6 trillion U.S. options market may be ``dead in the water,'' said Henry Schwartz, president of Trade Alert LLC. William Brodsky, chief executive officer at the Chicago Board Options Exchange, the largest U.S. options marketplace, called the SEC ban ``draconian.'' The Options Clearing Corp., which processes all trades of exchange-listed contracts in the U.S., said the limit on market makers may prove ``potentially disastrous'' for options, which give investors the right to buy or sell stocks at fixed prices in the future.
As you may have noticed, there was substantially smaller volume in financial stocks today, which is telling us that liquidity is drying up.

So like housing: You can keep the price high, but the number of transactions will drop. In addition, the volatility will also get large and spread in time.

I really hope nobody needs to unwind a large position in this market. The results could be disasterous with these volumes.

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