Wednesday, March 25, 2009

SEC Should Target Rumor Mongers

Everyone can come up with financial villains to blame for the economic mess, stock market volatility, and the collapse of some of our largest financial institutions.

Some people want to target short sellers. Others hate those pesky Direxion 3X FAS and FAZ ETFs. Or they just know its the elimination of the uptick rule.

But there is another set of villains that needs to be destroyed, and that is the rumor mongers. You know, the guys who come up with absurd gossip like “General Electric (GE) is gonna buy Taser (TASR)!!!” to drive stock prices up and make easy money.

Here’s an easy recipe for making money in any market:

Buy a whole bunch of call options on a stock and then spread a rumor that Microsoft (MSFT) is about to take the company over.

Voila!

Stock price rises, implied volatility rises, and you cash in. It’s that simple.

This happens on practically a daily basis in this market and the SEC does nothing about it even though there is a direct cost to the spreading of false rumors to engage in profitable options trading.

Options are a zero-sum game. An option is not created until somebody who wants to buy one connects with someone who wants to make an opposite bet, which would typically be a market maker.

Given how fast options prices can move, an honest options MM can easily get screwed by a false rumor, no matter how ridiculous it may be. MM’s do accept this sort of risk as part of their job, but shouldn’t the government fight for an honest marketplace, and punish those who profit from lies?

Or is this a cause that isn’t attractive enough from a political standpoint? After all, it’s a fight against something that makes stocks go up.

P.S. Visit GeithnerWatch!

1 comments:

Canadian Finance Guy said...

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