Thoughts Of The Day

Accumulated thoughts today:

Nice publicity for the mortgage insurers - The head of AIG's United Guaranty operations has positive comments on the mortgage insurers in a Bloomberg interview.

This should help PMI, RDN and MTG.

Good market breadth is important, in order to counter the high-frequency trading strategies.

Is the Greek deficit narrowing?

I hear that the Greek finance ministry has reported that the budget deficit narrowed 38.6% thus far in 2010. That can only help the euro and the capital markets.

The SEC has now approved new stock-by-stock circuit-breaker rules, which address the effect but not the cause. Unfortunately, the new rules beg the issue of high-frequency trading; they address the effect and don't address the cause!

Really dumb ... again!

On yesterday: Catching a slight break in price momentum, high-frequency traders ran rampant in the last 45 minutes yesterday.

One cannot overstate the erosion in investors' confidence that these programs are causing on a regular basis.

I would immediately implement three rules to halt the outsized impact of momentum-based high-frequency strategies.

Here are three basic rules that I would immediately implement for the purpose of halting the outsized impact of momentum-based high-frequency strategies that occur in the vacuum of hedge fund de-risking and in the absence of retail domestic equity inflows:

1. Institute a transaction tax exclusively devoted to high-frequency trading strategies. While I really hate this idea, it would immediately and dramatically increase the costs to high-frequency traders and reduce the incentives and edge of many price-momentum strategies.

2. Bring back the uptick rule for shorting. This short-sale rule was eliminated in July 2007 -- its original purpose was to prevent traders from being able to force prices downward. Bring it back!

3. Disallow the ability of high-frequency traders to see order flow and to discover stop levels.

long MTG