From Bob O'Brien - the option "exception" to NSScamming is something that is rarely discussed. Bob makes a lot of sense here.
Options Market Maker Wolverine, out of Chicago, sent in a letter to the SEC, commenting on Reg SHO. It was dated September 25, 2006, and the comment period closed on the 19. Still, why not make an exception for a participant accustomed to receiving exceptions from the rules? Think of it this way - they just failed to deliver the letter on time. No big deal. Happens every day.
The letter is noteworthy because it articulates clearly that the MM exemption allows the MM to hedge their put option positions at no cost, passing the cost to the equity investors in the form of dilution and delivery failures.
Read the letter here.
One of my favorite quotes:
"Presently, Wolverine is able to hedge options trades by selling shares short without first locating stock and generally is not subject to the mandatory close-out requirements for threshold securities. These exceptions allow Wolverine to continuously disseminate bids and offers (i.e., be on both sides of the market) because it can easily hedge market maker option trades with stocks that are illiquid and/or considered "hard to borrow."
Huh. So, exactly as the NCANS letter states, the cost of hedging put options is transferred from those speculating in the options market, and onto the backs of equity investors, who receive no benefit from that additional burden.
Nice.
And of course, the options MM doesn't want this free lunch at investor expense to end. No kidding.
I wonder where the SEC gets the authority to favor one class of participants and one market (derivatives) at the direct expense of another, separate market (equities)? I can't seem to find how that is consistent with investor protection, or in the public interest. I completely understand how it is in the interest of the options market makers, as otherwise they would actually have to charge more for options where the desired hedging securities are scarce, thereby annoying their customers with having to pay the freight for their speculation, and potentially cutting into the MM's profits. And it would really cut into the huge revenue stream from renting out your MM exemption to miscreant hedge funds who play your put options as a mechanism to create huge supply of naked short sale shares in Reg SHO securities.
I completely get how lucrative that trade is.
Who would want to have to pay for the benefit they receive, if they are currently getting it free? Who would want to have to charge manipulators more for speculating in securities where there is little liquidity, due to their having already naked short sold the target into the ground?
I couldn't have made their point better if I'd tried. |
