The Real Fundamental (Rant Alert)

Whatever your strategy and however you analyze opportunities, nothing is more important than position management.  Whether you prefer to think of this in terms of risk management, money management, or some slavish compliance with an asset allocation model imbedded in an obscure black box, doesn't matter - in the end, it's all about position management.

Thankfully, for most of us it's hard to come up with a series of real day-to-day risks negatvely impacting our ability to manage our positions.  Robust markets pride themselves on providing liquidity and managing counter party risks, and participants quickly flee issues, markets and counter parties that don't perform.  Fundamentally, if these risks can't be managed we can't place our bets.

Now, how many of us have scrutinized our contracts with the clearing houses and examined all the exceptional provisions, and exclusions?  Thought so.  Well, as a public service I'd like to draw your attention to the fact that the US SEC specifically prevents the punishment of lenders facilitating short positions who decide not to perform.  This "held harmless" clause results in all short sales surviving at the mercy of counter parties who've been given the right, by the relevant regulators, to manipulate the market.  If we examine the situation we'll quickly see how broken the system is:

1. you borrow from someone who's long and wants a bit of fee income,
2. you effect strategies based on your short position,
3. your clearing bank earns commissions all the way around,
4. the lender decides to pump up demand and, in effect, announces that all borrowers are subject to a buy in,
5. buy ins occur at the opening of the market the next day,
6. following the buy ins everyone is exposed on their hedges and the markets experience a huge "unwind" manufactured by a few longs.

Not being able to hold your clearer to an obligation, for which you're paying and prepared to keep paying, because any and all regulatory provisions trump normal business practice (in this case with an "held harmless" clause), incentivizes market manipulation and makes even the most fundamental position management involving short positions an unreasonable challenge.  To conclude, I suppose it's now "incumbent upon us" to add the manipulated short squeeze to the margin short squeeze plays.

As an addendum, the short I was denied was in long term US Treasuries via NYSE:TLT; the hedge was a rolling short 2-3 month put.  This was a core position which I'd maintained to profit from option premiums while also earning a little from a decline in long term Treasuries.  With the disappearance of the short position I had to cover the puts.  This coming week we'll get to see the full effect of this manipulated short squeeze (which started Friday morning) - the following week (Feb 20th), I'll likely re-establish this position.  If I'm handed mark-to-market returns again then I'll have to flee from this manipulated ETF issue and seek solace in shorting the underlying.