About those margin rates...
Those who want to take big risks in the stock market can now
do so using the futures. The margin rate there is, I believe, 3%
Another thing I believe but I seem to be alone in, is that public
purchases of options from the market makers is destabilizing to
markets. That is, they accentuate market movements.
The market for a stock consists of all the orders in the stock that
are still active. The most stable sort of order is a limit order. Limit
orders tend to stabilize stock prices. A limit order to buy helps
prevent the stock price from dropping below the limit. A limit order
to sell helps prevent the stock price from rising above the limit.
So limit orders are generally positive in terms of stability. If we
only had limit orders available, there could never be an order
imbalance, though occasionally there would be no trading.
Market orders are neutral in terms of stability. (This is not to say
that a bunch of market orders to sell will not result in a drop in
price, only to say that the ability of the market maker to determine
a fair price for the stock is neither helped nor hurt by market orders.)
If too many market orders come in on the same side, they can "use
up" all the limit orders on the other side. This resulsts in an order
imbalance, and a discontinuous stock price change.
Stop loss orders are negative in terms of stability. The existence
of a stop loss order (which is the epitome of momentum investing,
in my opinion) causes more pressure to be placed on a stock that
moves in the direction of the order. Stop loss sales are inherent
in investing on margin. Stop loss purchases are similarly
destabilizing to the up side.
Actions on the futures market are immediately hedged into the
market, so limit, market, and stop loss orders have the same
effect on the market maker as the same orders on the underlying
stocks.
The options market is more complicated. Assuming that the public
is net purchasers of options. (Unlike that hedge trader, Need...
who went short SPX puts Monday and got cleaned out) then
options orders are (short term) destabilizing to the market. The
reason is that the option market maker hedges the option by
its delta, and that delta changes positively with positive (for the
options holder) movements in the underlying security. (I.e. we all
want our options to go deep in the money where the delta is one.)
This means that the market maker has to hedge deeper as the
option becomes more valuable, and this is anti-stabilizing to the
market.
I think the huge number of people playing the options games are
why our volatility is up, which has, of course, increased the volatility
index to the point where options are now extremely expensive.
-- Carl |
