Speculation has been in our markets from the dawn of time. Nothing new there.
But manipulative practices ruin our markets -- and the options markets have become the straw that stirs the drink of today's speculative activity.
The gewgaws of speculation -- GameStop (GME) and Koss (KOSS) -- have barreled higher in some measure because of the manipulation of our (options) markets by a small cabal of traders.
As explained (below) by Jim "El Capitan" Cramer, near term (weekly) call options activity is the tail that is wagging GME's dog and share price.
"In order to get a stock to move you need to get people who are making orderly markets, the options markets, to be caught off guard. They have to be able to lay off their risk at the time of buying so they don't get caught short without a hedge.
So what happens if all day Tuesday and Wednesday you and your friends quietly came in and bought the March 95, 100 and 105 way out of the money calls. You bought them small enough that the market makers didn't take it seriously and didn't think to lay off as much risk.
Then in the last two hours of trading you come flying in and started buying the March 60s and 70s as well as the April 60s and 70s AT THE SAME TIME as you blitzed the common through multiple brokers. Again, keep in mind that an aggressive prosecutor could find that you fomented activity but nobody in the government seems to be paying much attention.
What would the market makers do? They are short these way out of the money calls that are now deep in the money. They are still being hit with out of the money call buys from even higher strikes. They have no choice. They can't risk being this exposed.
So they sweep. They take every share imaginable to be sure they aren't put out of business by some sort of initiative that takes GameStop to its rightful place of wherever these zealots think it can go.
Remember, the buyers spout that Ryan Cohen has a plan and it takes the stock much higher than $350. So why not buy these calls early and often,
The sellers of the calls can't hedge with other calls as they are being blocked by buyers who want everything they can get. And you get a blitz of a squeeze like we had. They can't protect themselves.
Here we go again."
-- Jim Cramer, "How Do You Pull Off What GameStop Buyers Did?"
I saw this sort of behavior, and wrote about it, regarding the manipulation of Tesla's (TSLA) common shares via weekly call buying over the last few months:
* Where is the SEC on Tesla?
* Are Tesla's Shares Being "Manipulated" Or Is The Stock Simply the Object of Insane Speculation?"
Finding a Solution
My solution to all of this is the implementation of a small financial transaction tax and for the elimination of near term (weekly) options.
As to those that believe in "caveat emptor" and laissez faire I say the role of our capital markets is not to look the other way when markets are being manipulated.
Manipulation builds distrust and alienates market participants.
Rather, the role of our capital markets is to raise and build capital - which helps provide industry with the money to hire and build, not to treacherously speculate -- by a small group of manipulators.
A financial transaction tax would serve to not only dent the manipulation and speculative activity in stocks like in GameStop, Koss, and the other shiny objects du jour but it would also produce a more fair and orderly market.
Importantly, this would improve the confidence of a fair and level playing field to most investors and traders. It would keep them in the game and not out of the game.
I suspect, as I mentioned in my presentation of Schwab (SCHW) , as a new short idea Wednesday that the probabilities of a modest financial transaction tax is higher than the consensus expects.
In addition to the above recommendations, of a financial transaction tax and the elimination of weekly options, several other changes should be made:
* We need instant clearing of trades to avoid more brokerage capital shortfalls and other problems.
* Brokers and regulators should more strenuously enforce borrow and locate rules before a short position is put on.
* The reporting of short disclosures should be the same, and as transparent, as reporting long disclosures.
To paraphrase Charlie Munger's comments Wednesday at The Daily Journal Annual Meeting, the world would be better off without today's manipulation and speculation.
To directly quote Charlie at that Annual Meeting:
"Novice investors are getting lured into a bubble in a "dirty way" by Robinhood (et al)"
(This commentary originally appeared on Real Money Pro on February 25. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)
