- US brokers, including Robinhood, reopen trading in surging stocks linked to reddit boards
- Traders try to spot the next flashpoint - silver mooted
- Bank of America predicts 10 per cent correction to come in equities
Updated 5pm 29.01.21
I don’t know about anyone else, but I cannot wait for the next GameStop earnings call. It will be an event to behold. That’s some way off; for now the frenzy continues: GME shares opened more than +100 per cent above $400 before paring early gains to trade +60 per cent or so. Efforts by the big brokers, notably RobinHood, to open up their platforms for trading the securities again has helped fuel a renewed bout febrile trading after yesterday’s selloff. If you want to know just much carnage is being done out there, S3 reports that GME shorts are down $19.75bn YTD (mark to market)– on just one stock.
Big questions and uncertainty remain ahead: first can RobinHood keep squaring its VaR problem with more regulatory capital to keep the show on the road, or it will be forced into halting the trading again? Doing so could be the death knell for the platform as users are already fed up and leaving. What are the implications for the IPO? Not good I’d say right now, but things can seem worse when you are in the middle of it. It’s got to build up trust again but once lost, trust can be hard to find again. (Of course we should remember the real RH customer are the Wall Street market makers paying for the order flow…but enough of that for the time being.)
Which goes back to the point that RH only halted trades because of VaR, reg capital requirements; the clearing house (DTCC) looked at at the price action on these stocks and said it’s just too risky so demanded more collateral to clear the trades. I cannot believe they actually wanted to halt trading like that. If RH fails because of an exodus of users it would be very troublesome for the wider market. Other questions remain, like whether shorting will ever be the same again (probably not, more on that below) and what kind of behaviour and bad market functioning do US regulators require before they step in? Thirdly, clearly it’s not just the Reddit crowd making the market – there are secondary actors riding and in some cases front-running expected Reddit trades, exacerbating the price action. Fourth, who’s going to use the share price gains to raise cash? GME might struggle due to timing issues but we have already seen American Airlines (AAL) say it will tap the market for $1bn after its shares soared this week as it too seemed to get swept up by the Reddit short squeeze trade.
Latest name to join the fray is Siebert Financial Corp (SIEB) which rallied over 300 per cent in early trade on no news, having jumped over 600 per cent in pre-market trading.
Meanwhile Citron Research - a key pillar of short seller community on Wall Street for the last two decades - has thrown in the towel. If you want to see a signal of a market top, then look no further than a long-time dedicated short like Andrew Left giving up on the short side.
Citron Research said it will discontinue short selling research, saying it will no longer publish “short reports” and will instead focus on giving “long side multi-bagger opportunities for individual investors”. One thing is for sure – hedge funds will not be taking such risky short side bets in future. You are liable to get squeezed. This upends certain assumptions we have worked under in the marketplace, so is likely to have far-reaching repercussions for the market. There is a clear risk also of bad, ill thought-out regulation coming over the hill as politicians on both sides of the aisle get involved. It is worth noting that in the UK and Europe all short positions of more than 0.5 per cent are disclosed so it is more transparent, and this is something that the US could reasonably look at. Moreover, allowing more than 100 per cent of the float to be out on loan is asking for trouble and probably could be looked at.
The SEC is monitoring it all very closely and I would not be surprised to see a clampdown in order to prevent this getting totally out of hand. In a statement today the SEC said it is “closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days”. It said the core market infrastructure remains “resilient under the weight of this week’s extraordinary trading volumes” but that “extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence”. This is an important point – volatility begets volatility. There was a suggestion that RH and co could face real scrutiny over the halt to trading yesterday, saying it would “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities”.
I would think there is good reason for the SEC to look at the manipulation/inducement side of this pump and dump. One, many will lose out and it will undermine confidence longer term. Two, let’s not forget that the primary purpose of the stock market is not naked speculation, but for companies to raise capital to fund growth, which all else being equal, increase net wealth and living standards. Trading and speculating are a secondary outcome of capital markets access. Clearly the SEC needs to consider whether we have “fair and orderly securities markets” right now.
Meanwhile the hunt goes on for which stocks could be next in the firing line. There has been a fair bit of chatter around Pearson and Cineworld, which both have a lot of short interest and we did see a pop higher earlier this week of about 10-12 per cent on what appeared to be some short covering in the wake of the GME trade. But so far we are not seeing this move much any more. Silver has been discussed already. There are obviously some names that have been talked about on Reddit and the lists of big put options by some hedge funds (easily available online).
Elsewhere, the bitcoin ramp has held – prices currently around the $37k mark after the Elon Musk Twitter bio change (see last update). Wall Street is broadly lower as it caps a pretty lacklustre week in the red, whilst shares in Europe are also down for the day and the week and now the month/year. 2021 started with a buzz and a lot of excitement about vaccines but it’s quickly fizzled out amid this circus.
10am 29.01.21
Now for the recriminations. RobinHood and other US brokers stopped trading in a number of stocks such as GameStop and AMC Entertainment that have lately been the target of retail investors seeking to ramp prices to spook hedge funds shorting the shares. Cue the upset: a class action lawsuit has been lodged against RobinHood, Democrat and Republican politicians are wading in by calling for Congressional hearings, and the SEC and even the White House say they are monitoring the situation. The fact is, the US brokers have obligations to maintain capital requirements mandated by the SEC - it’s been reported the company raised $1bn. There are things like counterparty risk. Free trading apps don’t run on fumes and markets don’t make themselves. But that won’t stop the Reddit crowd from claiming RobinHood is a poacher turned gamekeeper.
Seemingly, RobinHood and other brokers pricked the bubble – shares in GME fell 44 per cent to $199. AMC dropped 56 per cent. Hold on your hats, though, as shares are soaring in pre-market trading this morning with the US brokers set to allow some limited trading on the stocks today. I would issue the usual warning: it’s always riskiest when it looks easy, and usually these speculative crazes end in tears.
Our Reddit watchlist had a rough day, but pre-market and trading in Frankfurt suggests another rollercoaster today
Keep an eye on silver – the /wallstreetbets thread is laced with mentions of effecting a massive short squeeze on the metal. Yesterday we did see a sharp spike higher but it coincided with a swift reversal for the US dollar and gold also shot higher. One to watch though.
Watch the FAANGs today - German finance minister Olaf Scholz said a global tax on tech giants was now “highly likely”, following a call with US Treasury Secretary Janet Yellen. She had backed the moved in her Senate confirmation hearing last week. The Biden administration seems all but certain to engage with the OECD, which plans to establish a global tax regime this year.
European equities stumbled out of bed this morning, but we await the US session for our cup of ambition. There was a late blitz higher in the latter part of the European session yesterday as the US markets rose and the Vix eased back from multi-month highs (though it’s back up this morning). This week has wiped out year-to-date gains in several of the major indices as investors start to look rather hesitant to call for the next leg up. Worries about lockdowns ad infinitum in Europe are a clear weight and the EU’s rollout of vaccines, which has been marked more by threats to restrict access to Pfizer jabs than by anything very positive, is proving as painfully slow as its delivery of fiscal relief to member states.
Bank of America this morning calls for a 10 per cent correction in equities in the coming months. I've said lately a 5-10 per cent drawdown in Q1 was likely. Wall Street is about 3 per cent down since I made that call, so could see a little more downside and a test of 3,500 is possible. Beyond this, the backdrop for equities should be quite positive as vaccines kick in and the recovery takes off (fingers crossed).
Finally, if you want another example of the brave new world of finance we are now in, Bitcoin just jumped about $4,000 after Elon Musk added #Bitcoin to his Twitter profile. It’s fair to say that the regulators and the system are struggling to copy with the pace of change in the market.
Read our trio of special feature articles on bitcoin this week here:
What is bitcoin and should I invest in it?
Neil Wilson is chief markets analyst at Markets.com
