I took a little heat on Twitter when I mentioned I moved my trading account to a heavy cash position. The thing is that's a personal choice. I happen to have some other things going on right now that require my attention and will keep me from my screens 24/7. In the current environment, I do think you need to be more vigilant with your positions.
What's amazing is to see the push back into virtually everything else this morning in the pre-market when the news hit that Robinhood was cutting off new buying in the recent highflyers. The situation escalated as the morning wore on. Several brokers moved to a liquidate only and now news of asset freezes are hitting the wires. Clearing houses want nothing to do with these stocks. At this point, we all know it is akin to a pyramid scheme, whether everyone will admit it or not is another story.
All of that has led to some great back and forth. What now?
Well, the answer on how to stop the skyrocketing share prices appears to be to restrict people from trading. But what other things might emerge from the latest craziness on Wall Street? I see more bad potentials than good, but let's run through a few.
- The end of Naked Shorting - Please, Please, PLEASE let this happen. Naked shorting is an albatross around trading. Some will swear it doesn't happen, but many of us are confident knowing it does. This needs to stop. It should have been stopped years ago.
- Option contracts limited to notional value - I'm borderline here. Maybe a multiple of notional value, but the idea would be to limit or end gamma or convexity squeezes. It would take some pressure away from the market makers; however, if this is going to happen, there needs to be a better way for the average trader to execute or choose not to execute an option on option's expiration Friday. That's still a rigged game favoring people with connections high up.
- Eliminate margin or increase margin requirements - We know elimination won't happen. In terms of increasing margin across the board, like we saw with leveraged ETFs years ago, I think allowing brokerages to do it on their own is fine. I hope we don't see a change here.
- Ease 13D and 13F requirements - No. Please no. They already up the asset bar providing one ease. I can see some hedge fund managers pushing for this, but we would be foolish to change anything in this regard. The system now already offers little help to the average investor.
- Increase Pattern Day Trader (PTD) requirements - I don't love this one but I could see the level being moved to $50,000. I also foresee much tighter guidelines on options approval for trading, margin approval, and deeper dives into KYC (Know Your Customer). In short, get ready for more paperwork and signing more disclosures and documents that protect broker-dealers, not you.
- Transaction Tax - Want to crush flippers? This is how. Want to crash the market and drain liquidity? This should do it. Of all the things that could occur, I believe this would be the worst outcome. If anyone thinks the ire towards shorts and Robinhood is high, see what happens if this passes.
- Cash required behind all option positions - I think this is unlikely and extreme but requiring some cash behind a long option in case it gets exercised is similar to a margin bump. It would make options on most high-priced stocks out of play for traders. Stock splits would become a monthly theme. This idea was floated to me, so it isn't my own thinking. Of everything on the list, I doubt we see this in our lifetimes. In fact, I doubt we ever see it.
- Limit pre-market and afterhours trading - Okay, I don't hate this one. We have some platforms that allow trading to start at 4 am EST, while others won't open for 3 to 4 more hours. Volume is thin. Stocks can be jammed higher, creating a gap up, pressure, and FOMO. I don't think afterhours needs to be touched, but I honestly wouldn't mind the break. That being said, I doubt we'll see changes but a standardized pre-market trading session available via most broker-dealers might help everyone.
- Companies can hit the market faster with stock offerings - I believe this would help the situation immensely. Allow companies to raise cash quickly if a cohort of buyers is ready to snap it up at any price. Markets run on supply and demand. This would let is play out and could save some companies.
- Something I haven't thought about.
I'm not going to pretend like this is an exhaustive list. I fully expect some new regulation to come down from the market action of the past two weeks.
