Thursday, March 20, 2008

Uptick rule is a bunk. Cramer, get over it.

Jim ranted today on "Mad Money" about abolishing the uptick rule. He thinks that's the reason for bear raids on stocks, including some high-yield ones. Really? I think we witness quite different situation on market right now. In short, Quants went mad. Most of models used by quantitative speculators, AKA Quants, stopped working sometimes in July-August of 2007. The reason is highlighted by Alan Greenspan in his article in Financial Times. I blogged about it yesterday. Article really talks about models used by Central Banks, but the same is applicable to any economic model: people have uncanny ability to screw up any math model applied to human behavior. Especially if people are aware of this model. What probably happened: Quants honed their models to perfection, which means that of thousands of models only a handful got selected. As a result, most Quants used the same or very similar models. Quants trading patterns started affecting the markets and, surprise, most models stopped working at all. Which left on a table huge sums of money which are trying to find home and skewing all markets they go to. Commodities jumped, dropped, jumped. Foreign fund jumped, then crashed. Now significant amount of money went into shorting. Multiple margin calls don't help matters either.

Why I think the above scenario is in play? Volatility. Last several years, Quants made volatility almost the thing of the past. Every movement of more or less widely traded stock was smoothed by different kinds of model trading. Now volatility is back huge. Which means that a lot of Quants are out of business.

Uptick rule or not, bear raids will continue. On the other hand, it's hard to explain some movements by bear raids only. Take Cramer's example, Verizon and AT&T. Verizon (VZ) has 1.2% of shares sold short, AT&T (T): 0.9%! It's not short selling, it's more like lack of buying pushes those stocks down.

Jim, get real!

2 comments:

Anonymous said...

While I don't 100% agree with the removal of the uptick rule because I do think it allows for ganging up on a weak stock or negative news to make the downturn probably worse than it should be, I also think that Jim is full of it. His site, TheStreet.com, published a story on August 2, 2007, entitled "How to Handle the 'Uptick Rule' Removal" (http://www.thestreet.com/newsanalysis/stockpickr/10371933.html). That means they were well aware of the rule change and actually advising folks how to deal with it. The fact that now he is suddenly against it once again brings into question is integrity. Unfortunately, he brings ratings to CNBC; otherwise, they should dump him.

Muddling Investor said...

Wow, somebody is reading my scrabble! Self-congratulations are due.

About this comment. We can agree to disagree. I'm against uptick rule because it just lost its relevance in current electronic trading. The real problem is market manipulation, bullish or bearish. Technically, it's illegal. In real world, it's quite hard to prove. When somebody shorts a quarter of daily volume of the stock, it's manipulation. But if somebody buys a quarter, it's a manipulation as well. Trying to prove it when trades are spread between several funds (ganging up) and mixed between common, futures and options, is close to impossible.

In defence of Jim:

The article you pointing to was not written by him and on thestreet.com you can find a lot of different opinions, sometimes opposite to Jim's. And, of course, reading Jim for at least 10 year s, I know that he's an opportunist and can change his opinion on a dime. Which isn't such a bad thing for an investor/trader.

As for dumping somebody. I think Henry "Dow 36000" Blodget deserves dumping from every place even more, but he is there in Slate and on Yahoo! Finance.

Thank you for comment.