Market Curiosity: Exploring Markets And Systems

November 5, 2011

Fix HFT, naked shorting, position limits, margin determination, insider trading, questionable floats, and IPO’s. (update 8, NOV 2014)

Filed under: Editorials, Systems — Tags: , , , , , — Jeff Fitzmyers @ 2:22 pm

The MF Global and and FaceBook situations are emblematic of lame systems. This is not rocket science. Just employ transparency to keep the playing field fair.

A simple recipe for efficient and honest stock and futures markets.

  • NO EXCEPTIONS for specialists, locals, nobody.
  • Margins, if used, are 110% of maximum daily high low price range for the past 3 months, updated every minute.
  • All orders persist a minimum of 5 seconds.
  • All orders are basically a limit order.
  • Whoever has a miss-trade, margin call, etc., pays for it in full. If the account owner can’t cover it, the broker, then the exchange covers it.
  • No naked shorting in stocks. All shorts must borrow stocks first, then short.
  • Transparent. The what, and when of all positions and orders are disclosed in real time. No hard to define and enforce “insider trading rules” (the SEC currently offers 90 pages) (Insider nonsense).
  • The creation, status, and retirement of all orders, shares, and contracts are transparently verifiable from birth to death by via cryptography.
  • Contract breakers pay 5 times the notional value of each transaction.
  • Accounts are private property. So, only account owners can indicate the interest they charge, say 10% APR, to have their shares borrowed for shorting. No (re)hypothecation without consent and payment.
  • Andy Kessler’s book Wall Street Meat notes it costs about 7% to go public. New plan: Say a company could likely sell 50 million shares for $20/share. They publicly state that, “In 2 months we will offer 50 million shares at $40 on Monday. On Tuesday the price will drop to $39, Wednesday $38, etc., until all shares are sold.” Now all potential participants can wait to buy when the price works for them. Of course there is no nonsensical “quiet period”.

A simple recipe for fraudulent markets:

  • Have PLENTY of exceptions.
  • Take 6 eons to “study” or “investigate, or “test” something nebulous.
  • Have 16 trillion rules that only apply to some people, some of the time, depending on unverifiable nebulosity and graft.
  • Try to figure out what prices “should” be, with exceptions.
  • Make sure a lot of politics and blame are involved — but only blame those who have little political power.
  • And never address, nor make amends, for something like an alleged crooked judge:

+ Deconstructing Mr. Chilton’s interview…

Update November 2011
But insiders should be punished! There are tons of regulations, yet insider trading apparently happens all the time. Let the market take care of things. If a CEO sells shares right before bad earnings, fine — that’s very good information. Shareholders can then decide to move value to another company. Also, arbitrage will appear. The question really is, “Why is a person holding stock in a company that is not doing well and then trying to find a scape goat? Shareholders could be thankful insiders are clearly voting with their money. This is not talking about fraud. That is not doing what they said they are doing.

Update September 2012
A brief web search of concentration and ways to specify position limits turned up very little, and zero numbers, and zero formulas. Organisms manipulate their internal and external environment all the time. Proactive adaptation is a way to define the system of “life”.

Manipulate — Latin “handful”
– Handle, alter, edit, move.
– Examine by interaction.
– Control, influence cleverly, unfairly, or unscrupulously.

Manipulation is not the problem. It’s the fraud and cheating that overly distort prices. Transparency will help, and percent and function based position limits are likely good enough, but I have yet to come up with a purely market based formula — which is very curious to me. Does anyone know of a universal method for suggesting positions limits? Old idea was “Maximum position limit the greater of: 2%, or 150% of trailing 12 months of Issued and or Stopped contracts per futures series.”

I’m beginning to think the real issue is not whether or not there are position limits or not. Rather that there are exceptions to them. If there are limits, then have no exceptions. Otherwise have no limits. Arbitrage will sort it out on a level playing field.

There is so much “almost free” money currently sloshing around, “no limits” will likely increase price frequency and amplitude, but so what: “limits with exceptions” does the same thing and tilts the playing field.

The “rule of law” is lame for the same reason. It tilts the playing field because, generally, those who write the rules are exempt from them. Contracts are the way to go.

Update April 2014
Retiring SEC Lawyer Crucifies His Employer: “It’s A Cancer” Collecting Pennies On The “Bankster Turnpike”

Kidney, who was part of the initial team that was building the Goldman Sachs case, pressed his bosses in the enforcement division to go higher up the chain. He later took himself off the team after being given a lesser role, according to people familiar with the matter.

Update August 2014
High-frequency trading critic Chilton joins HFT lobby effort “The switch is a dramatic example of a regulator becoming a paid consultant for an industry he once criticized…”

Update September 2014
Why Doesn’t Eric (Place)Holder Simply Prosecute? “In other words all of this activity is already illegal. And has been for about 80 years. (Oh, by the way, why is there an exemption for manipulation of the market for a government security?)”

Update Almost October 2014
Why US Regulators Cannot Be Trusted

Anyone who thinks they can read the press and KNOW the truth behind manipulations is a fool. Often the press is not in a position to really know what is happening because they trust the wrong sources. The machinations behind the curtain are far more complex than anyone ever contemplated. I disagree with all the stories of manipulations because 99% are dead wrong. They charged Sumitomo who was the victim to protect the banks and they bailed out Long-Term Capital Management hedge fund without any authority to hide the losses of the banks. They let Lehman and Bear Stearns collapse claiming they had no authority but the next day bailed out AIG insurance when there was also no authority. Those in government lie all the time – nobody connects the dots… This is why the latest demands that the White House exclude banks from European regulation is the thrust of the entire free trade agreement. Talk about puppets on a string. Europe does not trust US regulators for a very good reason – they are sold to the highest bidder just as is the case with the White House. Welcome to the real world.

Update November 13, 2014
The Full Letter Written By The FBI To Martin Luther King Has Been Revealed

~FBI sent a letter to Dr. King, pretending to be a black person and implied that he should kill himself. Is the FBI any more ethical today than it was back then?

Obamacare Deliberately Written with 33,000 Pages of Regulations To Hide the Truth I TOLD YOU SO: Obamacare Admits to defrauding all Americans for billions and nothing happens to him. How are all those regulations and laws working out? 🙂

Update November 17, 2014
3 Billion Gallons Of Fracking Wastewater Pumped Into Clean California Aquifiers: “Errors Were Made” State Admits

California’s Department of Conservation’s Chief Deputy Director, Jason Marshall, told NBC Bay Area, California state officials allowed oil and gas companies to pump up to 3 billion gallons of oil fracking-contaminated waste water into formerly clean aquifiers, aquifiers which at least on paper are supposed to be off-limits to that kind of activity, and are protected by the government’s EPA – an agency which, it appears, was richly compensated by the same oil and gas companies to look elsewhere. And the scariest words of admission one can ever hear from a government apparatchik: “In multiple different places of the permitting process an error could have been made.”

Leave a Comment »

No comments yet.

RSS feed for comments on this post.

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Blog at