Tag Archives: Stocks

Citadel’s Illegal Trades — The Tip of the Iceberg?

South Korea has fined Citadel Securities for illegal stock trades made with high frequency algorithms. From a report out last night in Reuters:


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South Korea’s financial regulator has imposed a fine of 11.88 billion won ($9.66 million) on U.S.-based Citadel Securities, saying it disturbed the local stock market with high-frequency algorithm trading.

The Financial Services Commission (FSC) said in a statement released on Thursday the firm had distorted stock prices with artificial factors, such as orders on the condition of “immediate or cancel” and by filling gaps in bid prices.

These illegal trades were no isolated incident. Regulators found improper trades in thousands of stocks over a period of nearly a year:

The firm carried out such trading on an average of 1,422 stocks per day from Oct. 2017 to May 2018, totalling more than 500 billion won worth of trades, according to the statement.

Citadel’s illegal trades stand out as some of the most egregious ever in South Korea:

The Commission said it was the first time it had imposed fines on such high-frequency trading on the South Korean stock market, which has a high proportion of retail investors and little competition among algorithmic traders.


Citadel used strategies such as flash orders to gain an illegal advantage over other traders. This practice involves offering to buy or sell and then retracting the order in a fraction of a second.

Flash orders let you see the prices at which other traders are willing to buy or sell. This gives you an illegal edge over your competition.

In Korea, Citadel used these strategies to take advantage of mom and pop retail traders, which I find particularly heinous.

Citadel’s algos don’t stop in Korea.

The firm was recently fined by the US Financial Industry Regulatory Authority (FINRA) for frontrunning its customers. By placing trades ahead of customers, Citadel made money for its own account.

Breaking the law appears to be quite lucrative for Citadel.

Citadel Securities posted record revenues of $7.5 billion last year. Citadel’s hedge fund made even more, approximately $28 billion.

I think Citadel is using these illegal flash orders all over the world. They may also be using other illicit tactics we don’t know about yet.

After all, if you go to the trouble to create a program that can make you money, why not use it in as many places as possible?

The reality is that these speeding tickets will never stop Citadel. Fines in the millions are a cost of doing business for a multi-billion dollar operation.

Securities regulators worldwide should find out what exactly Citadel is doing in their markets. If they find more wrongdoing, they should simply ban the firm from trading for a period of years.

Nothing but a severe penalty will stop them.

Who says crime doesn’t pay?

What do you think is the future for Citadel? Leave a comment at the bottom and let me know!

More on markets:

Major Hedge Fund Down 54% — Survival in Doubt

Tiger Global Losing $185 Million a Day

As Fed Rates Peak, Are Markets Ready to Take Off?

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Photo: Citadel CEO Ken Griffin

Major Hedge Fund Down 54% — Survival in Doubt

In a brutal year for hedge funds, few have suffered more than Light Street Capital. The fund lost 54% in 2022, over $1 billion.


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From a report out last night in Bloomberg:

Light Street Capital Management’s hedge fund tumbled 54% in 2022, according to a person familiar with the matter, one of the industry’s worst performances last year. 

That drop rivals the 56% decline for Tiger Global Management, and is steeper than Lone Pine Capital’s 36% loss and Whale Rock Capital Management’s 45% slide.  

Light Street was the classic crossover hedge fund. It made big bets on technology companies, both public and private.

Many of those bets were at eyewatering valuations. Tech was crushed in 2022, pushing many such funds to the brink.

What strikes me is how simple Light Street’s strategy was. Its biggest holdings were a who’s who of growth stocks:

Anyone could’ve bought Tesla and hoped for the best. Why should investors pay Light Street 2% of assets and 20% of gains to do what they could do themselves?

Light Street’s 54% loss is abysmal even compared to benchmarks. The S&P 500 lost 18% last year, while the NASDAQ lost 33%.

Investors could’ve bought index funds and avoided hundreds of millions in losses, not to mention outrageous fees.

No wonder the California Public Employees Retirement System (Calpers), one of the most astute investors in the market, hasn’t invested in hedge funds since 2014.

The future for Light Street is bleak. It cannot charge a performance fee again until it more than doubles its fund.

That’s extremely hard to do. And without those juicy performance fees, the best traders will leave.

This is the kind of spiral that took down Melvin Capital. Light Street could be next.

I’m a huge bull on technology. But no stock is a good buy at any price.

What do you think the future holds for hedge funds? Leave a comment at the bottom and let me know!

More on markets:

Tiger Global Losing $185 Million a Day

As Fed Rates Peak, Are Markets Ready to Take Off?

Is SBF Laundering Money As We Speak?

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Photo: Glen Kacher, Founder of Light Street Capital

Google is Losing the AI Race

Today, Google is the king of search. But is it about to be dethroned?


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The search giant seems to face a new competitor every day. ChatGPT launched on November 30, with Perplexity and Allsearch coming shortly thereafter.

The “page of links” is starting to look antiquated.

Meanwhile, with nearly 200,000 employees, Google has released nothing in response. But new reports indicate Google may finally release a competitor this spring:

In addition to an ethical AI chatbot such as LaMDA, Google is now planning to reveal 20 more AI-based products at its I/O conference scheduled for May 2023. ChatGPT has sparked worry about the use and viability of conventional search engines, as the chatbot aims to provide answers to searches instead of just giving relevant links to users.

Taking over 5 months to respond to a mortal threat to your business is unacceptable. Google should’ve worked day and night to produce a ChatGPT competitor within 90 days.

So what’s the holdup?

Google has shown wariness in revealing AI products and services, especially with the raging debate on the ethics of using AI, with the potential for bolstering biases present in training data. All current AI offerings by Google are heavily restricted in terms of what they can be used for.

Large companies are obsessed with risk. Meanwhile, startups have to release something or they’re dead in the water.

By the time Google does release a competitor, it may already be outdated. OpenAI’s GPT-4 may come out in the first half of this year.

I don’t know what GPT-4 will be capable of. But seeing the massive improvement between GPT-3 and ChatGPT, I expect it to be very impressive.

How fast you launch and iterate is especially important in AI because AI tools can improve at incredible speed. From a recent column by economist Tyler Cowen:

ChatGPT, the model released late last year, received a grade of D on an undergraduate labor economics exam given by my colleague Bryan Caplan. Anthropic, a new LLM available in beta form and expected to be released this year, passed our graduate-level law and economics exam with nice, clear answers.

If that wasn’t impressive enough, ChatGPT and another chatbot just passed the United States Medical Licensing Examination. I certainly couldn’t do that!

Maybe Google will release a ChatGPT killer and blow us all away. But I expect to see it fall further and further behind, mired in complacency and risk aversion.

What do you think the future holds for Google? Leave a comment at the bottom and let me know!

More on tech:

Me vs. ChatGPT: Who’s a Better Blogger?

GPT-Powered Search with Perplexity AI

They Passed on Apple, Google and Facebook…Here’s Why

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As Fed Rates Peak, Are Markets Ready to Take Off?

In 2022, the Fed tightened its vice grip until we squealed. But as interest rates peak this year, markets are in a position for serious growth.


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It stands to reason: if someone is hitting you with a stick, the pain diminishes when they stop hitting you. To confirm this, I looked at four periods of peak interest rates from 1981 to today.

In most cases, markets jumped significantly within a year after the federal funds rate peaked.

Let’s dig into some examples….

Paul Volcker’s Hammer

Federal Reserve Chairman Paul Volcker took interest rates to eyewatering levels in 1981. They peaked at 19% that summer, a far cry from today’s 4.5%.

Markets continued to fall for about a year.

But then, something amazing happened. Volcker crushed inflation and stocks rocketed upward for almost 20 years.

A Stake Through Inflation’s Heart

Like the undead, inflation rose again in 1989. Volcker pushed rates back up to 10% by April, ramming a stake through its cold, black heart.

Markets jumped shortly after, rising about 16% in the next year.

The Go-Go 90’s

After falling to a low of 3% in 1993, the Fed hiked rates to a peak of 6% in the spring of 1995. Chairman Alan Greenspan aimed to cool a red-hot economy and prevent inflation.

Markets ignored him. Stocks went vertical, more than doubling in 4 years.

The Financial Crisis

By the mid-2000’s, the real estate market was out of control. The Federal Reserve took rates from a rock-bottom 1% to 5% by the summer of 2007.

This time, it really was different.

There was no quick rebound even as the Fed took rates to zero. In fact, it took over 5 years for stocks to recover from the financial crisis.

The financial crisis stands out as the worst since the Great Depression. Last year’s S&P 500 return of -18% doesn’t compare to the Great Recession’s -48% bloodbath.

In all, once rates peak, we usually see markets begin to climb in 12 months or less.

As companies look at a future of stable or declining rates, they’re more comfortable borrowing money and making investments. If rates peak mid-year as analysts project, I expect to see markets jump by the end of 2023.

What do you think 2023 holds for markets? Leave a comment at the bottom and let me know!

More on markets:

Tiger Global Losing $185 Million a Day

Is SBF Laundering Money As We Speak?

Why Crypto is Still Massively Overvalued

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Photo: “Governor Jerome Powell speaks at Brookings panel, ‘Are there structural issues in U.S. bond markets?’” by BrookingsInst is licensed under CC BY-NC-ND 2.0

Is 2023 the Best Time to Invest in Startups?

It was a rough 2022 in tech — layoffs, shutdowns, and stocks falling off a cliff. But 2023 promises to be a golden age for startup investors.

Here’s why I’m more excited than ever to invest in 2023…


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Valuations

In 2021, you could raise venture capital for a fruit stand.

I saw crypto startups with no product or customers raising “seed rounds” at $100 million valuations every day. Deals moved so fast that if you did any diligence, you might miss it.

Now, the market has slowed to a crawl. The vaporware startups have disappeared.

What’s left? Great companies raising at reasonable prices.

I’m often paying half as much for a company as I did in 2021. Even fast growing startups with several hundred thousand in yearly revenue go for about $10 million.

A lower entry price means more upside. And since a seed investor like me probably won’t exit for 10 years, prices could skyrocket in the mean time.

Focus

Founders today are laser focused. They’re not speaking at conferences or rolling out NFT’s.

They’re fighting to make sure their businesses survive.

Founder distraction is a giant killer of startups. For better or for worse, facing bankruptcy concentrates the mind.

I think founders and teams will perform better under this pressure, difficult as it can be.

Access

These days, I can get into any deal I want. Founders have to cast the net beyond the most famous firms in order to raise a round.

For angels and new VC’s, this is a boon. If you ask to get into any deal out there right now, it will probably happen.

There are only a few companies founded every year that matter. Our only job is to get as big a slice as possible of those deals.

That’s a lot easier to do in 2023 than it was in 2021.

Uber, Airbnb, and Block were all founded during the financial crisis. Someone is out there creating the next Uber right now.

It’s our job to find them.

How do you feel about investing in 2023? Leave a comment at the bottom and let me know!

More on tech:

The Magic of Milestone-Based Funding

Is SBF Laundering Money As We Speak?

Zero to One

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Photo: Uber founder “Travis Kalanick” by jdlasica is licensed under CC BY 2.0.

Latest Data: APE Fails to Deliver Hit 7.1 Million

Fails to deliver in shares of AMC Entertainment Holdings Preferred Equity (APE) reached staggering levels in December. Failed trades hit over 7.1 million shares in the latest SEC report before falling to end the period.

AMC issued these preferred shares in August as a way to raise capital. Since then, they’ve fallen steadily, losing over 75% of their value.


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Failed trades in APE shares peaked on December 2nd at 7,134,531. AMC shares also showed elevated fails to deliver, at nearly 300,000 shares.

Huge numbers of failed trades in APE preceded a substantial drop in the stock price. The shares lost 23% of their value in the next week alone.

A persistent pattern of huge fails to deliver can be a sign of naked short selling. This illegal practice involves selling short shares you never borrowed.

Naked shorting is a powerful way to crush a stock. If you don’t have to find any shares to borrow or pay interest, you can short as many as you like!

We’ve also seen persistent, massive fails to deliver in AMC’s common shares. Like APE, that has been coupled with a major fall in price.

So what’s going on?

My bet is that hedge funds are breaking the law and naked shorting AMC and APE shares. Why else would these huge numbers of failed trades persist for so long?

To get a sense of how out of line these fails to deliver are with other stocks, let’s do a comparison. Here are the fails to deliver on December 2nd for some of the largest stocks in the market:

Amazon: 40,406

Apple: 319

Berkshire Hathaway (Class B shares): 36

Google: 151,519

Microsoft: 9,233

These stocks are hundreds of times the size of AMC. And yet, AMC sees more failed trades than all of them.

Combined.

The SEC must investigate the chaos in AMC and APE shares. It’s the only way we can have a fair, efficient market for everyone.

What do you think of the failed trades in AMC and APE? Leave a comment at the bottom and let me know.

There will be no blog on Monday for New Year’s. Thanks for a great 2022 and see you on Tuesday!

More on markets:

Is SBF Laundering Money As We Speak?

New Report: AMC Fails to Deliver Hit 4.3 Million

Tiger Global Losing $185 Million a Day

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Photo: AMC CEO Adam Aron

New Report: AMC Fails to Deliver Hit 4.3 Million

Fails to deliver in shares of AMC Entertainment Holdings reached extraordinary levels in November. 4.3 million shares have failed to clear by November 14th, the latest data available.


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This new report, out today from the SEC, shows the highest levels of fails to deliver in months. This is particularly striking given the much lower fails to deliver in the largest stocks.

Let’s see how many fails to deliver some of the largest stocks in the market had on November 14th:

Amazon: 253

Apple: 0

Google: 0

Microsoft: 11,553

These companies are hundreds of times larger than AMC. But somehow, a little theater chain dwarfs them all in failed stock trades.

Fails to deliver can happen for benign reasons. But a long and persistent pattern of fails to deliver, as in AMC stock, can point to something more nefarious.

Huge numbers of failed trades can indicate naked short selling. This is the illegal practice of selling short shares you never borrowed.

It’s a potent way to crush a stock’s price. After all, if you don’t have to borrow a stock, you can sell short all you want!

Increasing failed trades may be related to higher borrowing costs for AMC shares. With fees going from 20% to up to 100% a year, borrowing shares is more expensive than ever.

It’s a lot cheaper to naked short sell. Unfortunately, it’s also against the law.

I urge the SEC to investigate the long term pattern of chaos in AMC shares. Only a full investigation can restore confidence in markets.

What do you think of this huge fails to deliver number? Leave a comment at the bottom and let me know!

Today is the blog’s second birthday! Thank you guys for a great two years! 🙏

There’s a lot more to come!

More on markets:

Tiger Global Losing $185 Million a Day

Hedge Funds Lose Billions as FTX Implodes

Is SBF Headed to Prison?

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Tiger Global Losing $185 Million a Day

One of the world’s largest hedge funds is fighting for survival. Tiger Global Management has lost $42 billion this year — $185 million for every trading day.


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The fund has been stung by bad bets in public tech stocks and startups. From a report in the trade journal PYMNTS:

Tech investor Tiger Global Management has reportedly slashed the value of its private funds by nearly 25% this year, leading to one of the industry’s largest-ever declines in assets at $42 billion.

Meanwhile, some of the companies held by Tiger Global’s venture unit that had been private but have since gone public lost value, sources told Bloomberg.

The unit oversaw around $43 billion as of the end of September, falling from $65 billion at year-end. Assets in the firm’s public investment operation shrank from $35 billion to $15 billion the sources said. Tiger Global was not immediately available for comment.

The real losses may be even bigger. The NASDAQ is down 30% this year, significantly worse than the markdown Tiger has taken on its startup portfolio.

To add insult to injury, Tiger was burned in the bankruptcy of FTX. The fund’s $38 million investment is now worth zero.

For Tiger’s public stock portfolio, the picture is especially bleak. The portfolio is down 57% this year.

This means Tiger’s public stocks would have to more than double just to get back to even. With a weak world economy, this seems unlikely.

I think Tiger’s shutdown is imminent.

The firm cannot charge performance fees until it makes back its losses. That could be years from now, if ever.

That juicy 20% performance fee is the lifeblood of hedge funds. Without it, there are no big year end bonuses.

Let’s face it: people don’t join hedge funds to save the world. They sign up to make money, and lots of it.

With Tiger’s future in doubt, employees are likely to jump ship.

But if the managers create a new fund, they start with a clean slate. They can start charging performance fees again on day one.

Nice for them. Not so nice for their investors.

What do you think the future holds for Tiger? Leave a comment at the bottom and let me know!

More on markets:

Is SBF Headed to Prison?

How SBF’s Hedge Fund Imploded

Hedge Funds Lose Billions as FTX Implodes

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Photo: Tiger Global CEO Chase Coleman

Talking FTX, Twitter and Startups at Starta VC

Last week, I had a chance to do one of my favorite things: chat with awesome entrepreneurs!


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The venue was Starta VC, an early-stage venture firm based in New York City. Their accelerator brings great entrepreneurs from abroad to the US for an intensive program on building startups, American-style.

These young founders asked some great questions. Some interesting moments:

1:25: Sector-specific investors vs. generalists

2:14: FTX collapse

5:24: How angel syndicates work.

7:13: A trick I stole from Benchmark.

7:53: How I choose startups.

12:41: What’s going on in today’s market.

16:40: The one thing founders should never do.

24:33: Big Tech layoffs.

30:09: How to write cold emails that actually get a response.

33:41: Why AR will beat the metaverse.

42:17: Elon and the Twitter deal.

Thanks to Starta for the invite!

What part did you like most? What did I get wrong?

Leave a comment at the bottom and let me know!

There will be no blog tomorrow. I have an acting gig.

See you on Wednesday!

More on tech:

Is SBF Headed to Prison?

FTX Blows A Massive Hole in Tiger’s Portfolio

Is It Time for a Startup Hiring Spree?

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FTX Blows A Massive Hole in Tiger’s Portfolio

It’s going from bad to worse at Tiger Global Management. As crypto exchange FTX implodes, Tiger could lose hundreds of millions of dollars.


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From a new report in Forbes:

Tiger Global Management appears to have just taken another hit.

The hedge fund headed by billionaire Chase Coleman has been among the most prominent investors in Sam Bankman-Fried’s FTX crypto exchange.

On Tuesday, Binance CEO Changpeng Zhao tweeted that his firm was buying FTX’s non-U.S. businesses to rescue it from what he said was a “significant liquidity crunch.”

The hedge fund giant made multiple, huge investments in FTX:

Tiger was part of a group of investors in FTX’s January Series C round that valued the company at $32 billion. It previously also participated in a Series B round that valued FTX at $25 billion. During that raise, FTX took a page out of Elon Musk’s playbook by raising exactly $420.69 million.


Both the Series B and C raised about $400 million. A giant like Tiger would likely have written checks of at least $100 million in each of those rounds.

I’ve seen Tiger in numerous deals, and their typical check size was $100 million or more.

Now, Tiger will likely take a total loss on its FTX stake. Binance is expected to buy the exchange for essentially nothing, simply assuming its liabilities.

This means Tiger could be looking at hundreds of millions of dollars, up in smoke.

This comes at what’s already a terrible time for Tiger Global. Its fund is down 55% for the year, with losses accelerating last month.

Meanwhile, it has only marked down its private portfolio by 8%. That is far too little given the huge losses in the NASDAQ, which means more markdowns to come.

Could this be the straw that breaks the camel’s back? Only time will tell.

But even without the implosion of FTX, I expect Tiger to liquidate.

Its fund must more than double to get back to its high point and start charging performance fees again. Those fees make up most of a hedge fund manager’s pay.

Tiger has taken huge losses in both public and private markets. Why does anyone still trust them with their money?

Were I an investor in Tiger, I’d be dumping every cent of it yesterday.

What do you think the future holds for Tiger? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Losing $40 Million a Day

Tiger Global Down 52% — Losses Over $18 Billion

Hedge Fund Manager’s Arrest Shows How Market Manipulation Works

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Photo: FTX CEO Sam Bankman-Fried