Possible Option Short Amendment

Via free Bloomberg U.F.O. SEC Considers Revising Shorting Ban in Options Market (Update1) By Edgar Ortega and Michael Tsang Sept. 19 (Bloomberg) -- The U.S. Securities and Exchange Commission may revise a rule barring short sales of financial companies to exempt options market makers. SEC staff will recommend commissioners approve a rule to grant a permanent exemption, 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. ``They're pretty much dead in the water,'' said Henry Schwartz, president of Trade Alert, a New York-based provider of options market analytics. ``Nobody will quote anything because nothing is hedgeable. They're basically paralyzed.'' Short Rule The SEC prohibited investors from betting against 799 banks and brokerages beginning next week to stem a sell-off that erased as much as $3.8 trillion from stocks globally after the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. That will prevent firms such as Interactive Brokers Group Inc. and Susquehanna International Group LLP from hedging their risks when clients buy or sell options on financial shares. The SEC's order comes in the midst of the biggest drop in financial-industry shares since at least 1962, according to data compiled by Birinyi Associates Inc., a Westport, Connecticut- based research and money-management firm. Goldman Sachs Group Inc. and Morgan Stanley, the remaining independent securities firms on Wall Street, plunged by the most ever this week, prompting Morgan Stanley Chief Executive Officer John Mack to say short sellers are using abusive tactics to attack companies. Market makers, which facilitate trading in the options market, are obliged to quote prices at which they'll buy and sell securities. They reduce the risk of completing some trades by selling short shares in the underlying security. Under the SEC rules disclosed this morning, they may have been forced to take on more risk with every trade. That prospect has already cost their clients. Wider Spreads Prices for options today show that market makers are already seeking to compensate for the added risk by widening the difference between their bids and offers, according to Peter Bottini, an executive vice president of Chicago-based online brokerage OptionsXpress Holdings Inc. The wider spreads make it more costly for investors to buy or sell options. ``The quality of markets is absolutely terrible,'' said Bottoni, a former market maker at the Chicago Board Options Exchange. ``For our retail customers, the costs of adjusting their portfolio has gone through the roof because the bid-ask spreads have gone through the roof.'' Market makers account for 44 percent of the options contracts traded in the U.S., according to Chicago-based Options Clearing Corp., which guarantees all trades. Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference. To contact the reporters on this story: Edgar Ortega in New York at ebarrales@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net

At least they are beginning to see how this ban will have "unintended consequences". The problem is that the negative impact on option market makers is only one of hundreds of "unintended consequences" this ban will create in the capital formation process. Are they going to set up an exception for every single one? In my mind's eye, I see a whole army of little guys running around plugging the holes that are sprouting out everywhere in a dam the size of Rhode Island....

I agree Don. IMO this whole thing is a cluster#@%*. I'll try to post a bit this weekend about what's happening in the MBS market. What a zoo. Best. U.F.O.

IYB, UFO, what would you guys do to fix this mess. You both have a wealth of experience in this business and possibly other businesses. Don't be surprised if your posts on this board make it all the way to washington. In part or in whole. Some faces in the Read-Only crowd here at TT may surprise us all. Thank you both and good weekend, J

As much of a nightmare as this credit crisis is to contemplate, I can still think of an infinately scarier one: The world depending on me to fix it!!!

Elect me and IYB as national leaders. Our election plank will be "If You Believe In U.F.O.'s".

U.F.O.

(Maybe we can come back later this weekend on a serious note, but for now all I can think about is my lovely bride and Mexican food. Adios...)

Edited by U.F.O., 19 September 2008 - 06:28 PM.

P.S. I got laughed at last night by a few for suggesting that a ban on short selling would have a profound effect on both short ETF's and options market makers. The trading halt today on SKF and the news above on options shorts stand as my vindication. Without access to the underlying stock....the machine grinds to a halt. U.F.O.

SKF got the same treatment as Jack Nicholson in Easy Rider.

Before anyone gets too excited --

""The Securities and Exchange Commission took the dramatic step of banning for ten days short-selling on 799 financial stocks""

10 becomes 30 becomes ?. Would you be more excited if your kid was put on house arrest for 10...maybe 30...with the option for more time in the slammer? Don't underestimate the power of GOVT idiosy. U.F.O.