Category Archives: The SEC

Lehman II?

The second-largest crypto exchange, FTX, has halted withdrawals and appears to be bust. Formerly valued at $32 billion, one must assume that it is now worth a lot less than that. The largest exchange, Binance, negotiated a non-binding bailout agreement and then withdrew it after a look at the books. I wonder if this is crypto’s Lehman moment? The time when the fantasy meets hard, cold reality?

Edit: FTX has/had more than five million customers worldwide. The Miami Heat’s home stadium, named FTX Arena, will be getting a new name. Porn movie producers Bang Bros. tweeted that their 2019 $10 million bid for the naming rights was still good, and they added that they promised that a lot fewer people would be f***ed.

Clear The Track

Here comes Shaq. Shaquille O’Neal, not Eddie (only older Canadians will understand). Apparently Shaq is “advising” a SPAC that is considering acquiring WeWork, the office space outfit that leases big and long and rents small and short. Yes, that does sound like a formula for high risk and so far that has been borne out by history.

As to the future, if I had to pick candidates for the company least likely to survive the flight of workers away from offices and downtowns, WeWork would be right at the top of my list. But SPACS have to spend the money they raise, or the sponsors can’t collect their share. So it’s panic to buy. Anything, apparently. Selling that deal to the investors, whose approval for the transaction is required, should be an interesting exercise. Popcorn, please. He shoots! He scores?

Shoeshine Boys (and Girls)

Joe Kennedy, JFK’s father, is said to have exited the stock market before the 1929 crash after a shoeshine boy gave him some stock tips. Bernard Baruch, a legendary investor, described the scene before the crash:

“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”

It seems that the Robinhoodies and their ilk are the modern equivalent. It is interesting how their strategies have changed, from simple individual daytrading to semi-organized crowds pursuing sophisticated options strategies such as gamma squeezes, then on to short squeezes. “WallStreetBets” subreddit seems to be one of the main cheerleading tools, with two million members and who knows how many lurkers. It does seem that the squeezing is as much a power trip as it is financially motivated.

Don’t get caught out in the storm. At least not without protection.

Bitcoin has a bad case of the sags as the Hoodies are busy pumping small caps in order to squeeze or blow up the hedge funds shorting them. The FOMO mania is gone. The exit door is still open but those doors have a way of slamming closed in an instant.

Remember that in a real crash, like 1929, many stocks go completely bidless.

Robin Hoodies Attack Sheriff

Today’s sudden collapse at 10:45 was, in my opinion, likely to¬† have been a forced liquidation of a large position, very possibly a small hedge fund, to cover a margin call. One can imagine that it was a victim of the vicious short squeezes being led from Reddit, where the Robbing Hoodies use their stimmie-sourced buying power to squeeze short positions in smaller stocks where there are substantial short positions.

There is already one major casualty of this process, per zero hedge:

Melvin Capital, which we learned last week had suffered massive losses on its shorts, is set to receive a $2.75 billion capital injection from hedge fund giants Citadel and Point72 and investors (in what appears to be a bailout so Mevlin Capital founder Gabe Plotkin, a former star portfolio manager for Steven Cohen, could pay his margin call)

This is just another symptom of the broken market created by the Fed. If they don’t rein this nonsense in pretty soon, the whole thing is going to blow up in their (and our) faces. Idiots.

Market manipulation, by the way, is illegal. But the SEC only goes after sitting ducks, small ones at that.

SoftBank Is Back

Apparently SoftBank spent $200 million on calls in the big tech names yestrday, preparing another gamma squeeze such as the one that is used to drive the market up in August.

Will the dealers or the regulators let it get away with it again?

Bucket Shop

By the 1880s the electrical telegraph system, that began to be deployed in the 1840s, had been adapted to the distribution of stock exchange prices. Ticker tape machines provided a continuous stream of quotes printed on paper tape at about one character per second (whence the “ticking” noise).

Access to actual trading on the stock exchange was expensive and limited to those with substantial assets, but people of lesser means wanted to speculate. So the “bucket shop” came about. The bucket shop provided a means for customers to bet on the fluctuations of stock prices, as shown by the ticker tape, without the expense and delays of actual trading. However, the business practices of the bucket shops made it very difficult to succeed, but not impossible, as shown by famous speculator Jesse “Larry” Livermore who made his first $1,000 at age fifteen (1892).

The terms of trade varied among bucket shops, but they typically offered margin trading schemes to customers, with leverage ratios as extreme as 100:1 (a deposit of $1 cash would permit the client to “buy” $100 in stock). Since the trades were illusory and not settled in the real market, the shop likewise made no real margin loans, but did collect interest in cash from the client. The client could easily imagine that he had been loaned a great sum of capital (in fact an illusion) for a small cash deposit and interest payment.

To further tilt possible outcomes in their favor, most bucket shops also refused to make margin calls. The elimination of margin calls was portrayed as a benefit and convenience to the client, who would not be burdened by the possibility of an additional cash demand, and touted as a feature unavailable from genuine brokerages. This actually made the client more vulnerable to a heightened risk of ruin, with the losses flowing entirely to the bucket shop. In this situation, if the stock price should fall even momentarily to the limit of the client’s margin (highly likely with thin, highly leveraged margins in volatile markets), the client instantly forfeits the entire cash investment to the shop’s account.

Margin trading theoretically gives speculators amplified gains, but trading in a bucket shop exposes traders to small market manipulations due to the shop’s agency. In a form of what is now considered illegal front running and self-dealing, a bucket shop holding a large position on a stock, and knowing a client’s vulnerable margin, might sell the stock on the real stock exchange, causing the price on the ticker tape to momentarily move down enough to exhaust the client’s margins. Through its opportunistic actions, the bucket shop thereby gains 100% of the client’s investment.

Today, “bucketing” is illegal. However, the Robinhood brokerage which has attracted so many small traders has retained many of the features of the bucket shops. Robinhood attracts the young and naive using video game and slot machine ideas. Instead of putting the trade “in the bucket”, it sells the orders to high-speed traders. To complete the model, Citadel, the largest of these has just been slapped on the wrist and fined for front-running and failing to display customer orders. Sound familiar?

Loose Cannons

In the days of fighting sail, the ship’s main armament typically consisted of rows of cannons lined up on each side of the ship. These cannons fired through ports in the side of the hull and were mounted on wheels so that they could be pointed and able to recoil when fired. Normally, they were constrained by heavy ropes. But from time to time one or more would get loose. Each cannon could weigh as much as three tons and would then roll around the gun deck as the ship pitched and rolled, crushing anything or anybody in its way. The gundeck would be crowded most of the time – each gun on a large ship had a crew of 14 men who not only worked but ate and slept near their gun. Needless to say, a loose cannon could do much more damage than any broadside from an enemy ship.

In the market, the black boxes or “algos” are the equivalent of the loose cannons of yore. They are out of control and roll around in herds, as many of them share similarly programmed rules. You can watch the “herding” in the stock market by watching the “Tick” as it moves to extremes in both directions – that’s the herd. You hear about “flash crashes” – that’s a herd of algos running over some security or asset class. They pose a huge danger to the financial system, and need to be reined in. The mistake that the regulators make is to only consider them as single entities, without comprehending the emergent phenomena arising from unintentional herding behavior.

The Tilted Playing Field

The stock market is supposed to be a level playing field for all participants. But it clearly isn’t, and the referee, the SEC, doesn’t care and actively favors the tilters.

Understanding the issue is straightforward. If, every morning, you got the day’s closing prices, do you think you could make money? Of course, it would be a no-brainer.

How about an hour from now’s prices? Or a minute? Same answer, although you’d have to be quick. If you’re a computer, you could be quick enough.

Well, the favored few have computers, and no they don’t get a day or even a whole minute but they do get fractions of a second and that’s plenty for a computer capable of billions of instructions in a second. They are allowed direct connections to the exchange computers and are often only a few feet away to minimize any network delays. So they see prices before you do, and can respond before you can. Making money consistently is easy-peasy. They do pay the exchanges for the privilege, but that’s nothing in comparison to the profits they reap at your and my expense.

What can you do about it? Not much. Just remember the SEC is the retail investors enemy. Like many government employees, SEC personnel are corrupted by the promise of lucrative sinecures after their stay at the SEC. It’s called regulatory capture.

So they go after visible but harmless and relatively defenseless prey like Martha Stewart.

Wag The Dog

As I have said many times before, I believe the biggest mistake the CFTC has ever made is the securitization of VIX. This decision has allowed VIX futures, options and ETFs, trading in any and all of which provides staggering leverage on the overall market. Here’s a piece which shows both how easy it is to manipulate VIX, and the effect of VIX manipulation on the overall market.

I’m watching this as I write, as the manipulators crush price discovery. Of course the eventual consequences of this will be catastrophic – the “Volgasm” of early February was just the fat lady clearing her throat.

I Spoke Too Soon

I thought the massive crush of the short VIX ETFs and serious losses for anyone short volatility would have discouraged the VIX sellers.

Well, no. They’re back, using VIX slams to pump the market today and yesterday. Sigh.

Why are we wasting money on a do-nothing SEC and CFTC who are allowing this kind of conduct?