Friday, March 28, 2008

thoughts on the abolition of the uptick rule

as long as we have markets, we will have those who engage in nefarious activities - in both directions. have any short-sellers or practitioners of "bear raids" ever engaged in anything as massive as:

1. the fed's pre-opening announcements at various parlous points over the past eight months;

2. the fed's 10/98 surprise rate cut just before options expiration and after futures trading in bonds closed;

3. the entire dot-com pump-and-dump era;

4. the subprime mortgage era, etc?

also, if the uptick rule is necessary for stock markets to function, why do other countries' markets seem to do fine without them? only japan has underperformed the united states for this millennium.

third, when markets self-organize, as has been the case in cash interest rate, currency and commodity markets, do they have an uptick rule? no; that would obscure price discovery, risk transfer and the facilitation of commerce.

fourth, where is the statistical evidence an uptick rule leads to statistically different results over any selected period of time? you can maneuver the price up or down over a very short period of time, but you cannot maintain it there.

fifth, corporations trading their own stock have a tax advantage under Sec. 1031 of the internal revenue code that you and i do not have. and if the executives of these firms' compensation is tied to the stock price, do you think they will be disinterested parties?

sixth, stocks are classified as a risky asset for a reason: they are risky! trying to put sheep's clothing on these wolves is pointless. at the end of the day, all a stock is is a piece of paper with someone's picture on it. they can and do go "poof" with very little warning.

william tecumseh sherman said it best, "War is cruelty, and you cannot refine it." so are investing and trading. trying to bias the game in your favor on a tick-by-tick basis while ignoring the long-term consequences of the massive structural biases that have contributed to the bubbles we have suffered from twice in the past eight years is both intellectually dishonest and personally self-destructive.

and just so there are no misunderstandings, i have never shorted a stock in my life and realized a long time ago that buying index puts was a mug's game at best.

No comments: