Tag Archives: Trading

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

April 29, 2022 tremendousblog 8 Comments

A proposed SEC rule could starve hedge funds of cash by making it nearly impossible to raise money from pension funds. From the magazine Risk:

Pension funds in the US may be unable to invest in hedge funds if a sweeping package of financial reforms by the markets regulator is passed in its current form, warn hedge fund managers and lawyers.
The US Securities and Exchange Commission is proposing a rule that aims to stop private fund managers evading legal liability for actions leading to investment losses. Hedge funds depend on this indemnity to obtain insurance.

The SEC released the proposed rule in February. From the SEC’s press release:

The proposals also would prohibit all private fund advisers from engaging in several activities, including seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity…

Without indemnification, insurance becomes prohibitively expensive or completely unavailable. And without certain types of insurance, institutions including pensions won’t invest in a hedge fund.

This could starve hedge funds of cash. A huge percentage of hedge fund assets come from pension funds.

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An exact count of the percentage of hedge fund assets that come from pensions is difficult to find, given limited disclosure requirements. But investment data company Preqin estimates that 40% of hedge fund assets come from pensions.

Public employee pensions alone invest hundreds of billions of dollars in hedge funds, with even more coming from private company pensions.

If this SEC rule passes in its current form, hedge funds could lose nearly half their assets. It will be difficult to find another source of such huge sums.

You can bet that hedge funds will fight this rule like hell. And with their high priced lobbyists, they may well succeed in killing it.

But if not, hedge funds may be facing some very lean years ahead.

Do you think the SEC will cause a mass exodus from hedge funds? Leave a comment at the bottom and let me know.

Have a wonderful weekend everyone! 👋

Over 57,000 Sign Petition to Ban Payment for Order Flow

October 28, 2021 tremendousblog 1 Comment

At last count, 57,610 people have signed a petition at Change.org to ban payment for order flow. This practice involves market makers paying brokers for the chance to complete trades.

The market makers claim they complete the trade at slightly better than public market prices while still making a small profit.

At least one study indicates that payment for order flow actually does save customers money, especially considering that it removes the need for commissions. However, both Citadel Securities LLC and Robinhood Markets, Inc. have been fined for providing worse prices than public exchanges.

I favor not a ban, but more careful regulation of payment for order flow. I think the SEC should require brokers like Robinhood and market makers like Citadel to release data on a regular basis proving that they’re getting customers better prices than public exchanges.

Both companies are world class experts in data aggregation and analysis. They’re more than up to the task.

This type of regulation would allow retail traders to continue to trade commission free while also making sure they’re protected.

Meanwhile, if an investor doesn’t want their order sold to a market maker, Interactive Brokers offers such an account. But sure enough, it’s not free.

Many companies also sell investors their stock directly, no broker needed. Such a plan could be a great service for companies like AMC Entertainment Holdings, Inc. and GameStop Corp. to pursue.

So, will you be the signing petition? Let me know in the comments at the very bottom of the page.

New Data: AMC Fails to Deliver Down 85%

September 15, 2021 tremendousblog Leave a comment

New data from the SEC today shows fails to deliver in stock of AMC Entertainment Holdings, Inc. dropped 85% in the second half of August:

AMC fails to deliver from 8/13 (last day of prior reporting period) to 8/31 (last day of current reporting period), from SEC data

Investors have closely watched fails to deliver in this popular stock. Its large and persistent fails to deliver, or trades that don’t close, may be a sign of naked short selling.

Let’s review what short selling is and how naked short selling fits in. Short selling is borrowing a stock to sell, then giving it back to the owner later.

A short seller is betting the stock’s price will drop. That means he’ll make money because the shares he has to return aren’t as valuable as those he sold.

Naked short selling is selling short shares without borrowing them first. It’s generally illegal.

Naked short selling can powerfully push down the price of a stock. If you never have to find shares to borrow, you can sell as many as you want!

A long term pattern of huge fails to deliver, which we see in AMC stock, often happens because of naked short selling. Trades don’t close because the shares never existed in the first place.

Hedge funds have been short selling AMC shares all year, and have taken some brutal losses along the way.

I suspect they are using illegal naked short sales to drive down the price and save themselves.

I suspect hedge funds are using illegal naked short sales to drive down the price and save themselves. $AMC #AMC
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Just because fails to deliver dropped at the end of August doesn’t mean the problem is gone. As you can see from the chart above, when they become extremely elevated the market makers tend to clear them up, only to see them rise again.

AMC still has a huge amount of fails to deliver compared to other stocks. With 140,978 shares failing to deliver on August 31st, AMC has 28 times the fails to deliver of Apple.

Apple is the biggest stock in the market, at over 100 times AMC’s size.

The SEC and market makers have a long way to go to make the market in AMC shares work properly.

What will it take to get their attention?

AMC Fails to Deliver Up 1088% in Latest Data

September 1, 2021 tremendousblog 1 Comment

Major new data just came out today from the SEC. It shows fails to deliver in AMC Entertainment Holdings, Inc. up 1088% in the first half of August:

These fails to deliver sometimes happen for benign reasons. But when massive fails to deliver occur in a stock over a sustained period, it’s often a sign of naked short selling.

Naked short selling is the illegal practice of intentionally selling shares short (betting against them) without ever borrowing the shares as required. This is a powerful tool to distort markets. Since you never have to actually obtain any shares, you can sell as much as you want, pushing down the price.

The fails to deliver in AMC are truly enormous. And after falling significantly last month, they’re back with a vengeance. As of August 13, the last day in the series, AMC’s fails to deliver were 157 times larger than Apple’s. Apple is the largest stock in the market, at 113 times AMC’s market cap.

How could there be so much questionable activity in such a small stock? I strongly suspect illegal trading, likely on the part of hedge funds.

Maybe they’re trying to make back some of their losses.

Wall Street Has a New Tactic in its Fight Against AMC: Options

June 9, 2021 tremendousblog Leave a comment

Hedge funds were burned big time trying to short shares of AMC Entertainment Holdings, Inc., with losses of approximately $4 billion after the stock did this:

But like moths to the flame, they can’t seem to shake the temptation to bet against AMC and the Reddit retail hordes. Reuters reports that a new strategy is gaining popularity on Wall Street. It involves a complicated options trade called the “bear put spread”:

In the trading strategy, the investor buys one set of put contracts, which gives them the right to sell the underlying shares at a certain “strike” price by a certain time, and sells another set with a lower strike price valid for the same time frame.
The sale of the put options offsets most of the upfront cost of buying the first set of contracts. If the shares don’t fall, or fall less than anticipated, the trader’s losses from the put purchase will be covered to a large extent by the proceeds of the sold put.

This strikes me as a lot safer than short selling, but with a stock as unpredictable as AMC, I think a better move would be to avoid betting against it at all. Other overvalued stocks, of which there are no shortage these days, may be a better bet.

Not to be outdone, retail traders are piling into bullish options on AMC. These derivatives can magnify their gains beyond what simply owning the stock can provide:

Traders last week spent $11.6 billion on options contracts tied to AMC, more than on the SPDR S&P 500 ETF Trust, Invesco QQQ Trust and Tesla Inc. combined, according to Cboe Global Markets data. Options on those stocks are typically among the market’s most popular.

Bloomberg reports this demand is coming primarily from retail traders:

Trades involving 10 contracts or fewer are rising as a percentage of overall equity-call volume, according to data from the Options Clearing Corp.

This retail option buying can help drive the stock higher as option sellers need to buy shares to cover their exposure. After all, if the stock goes up substantially, they’ll have to pay out those gains to the option holders.

Because one option contract covers 100 shares, it’s easier to lose money faster in options than owning the underlying stock. Traders, both retail and institutional, would do well to be cautious.

Departing GameStop CEO Gets $179 Million Payout

April 23, 2021 tremendousblog Leave a comment

GameStop CEO George Sherman will be leaving the company soon, but not empty handed:

As a condition of his exit, GameStop is speeding up the time frame for Sherman to receive the shares, generating the award.
Sherman, who has been CEO since April 2019, forfeited $98 million worth of stock this month because he did not meet performance targets, GameStop disclosed last week.
Still, he stands to receive a stock payout currently worth $179 million because GameStop granted him more shares linked to his tenure at the company rather than to his performance as most companies do with their CEO, said Eric Hoffmann, a vice president at compensation consultant Farient Advisors LLC.

This strikes me as bad policy and poor corporate governance, especially for a company that is losing a lot of money and facing rapidly declining sales. Why should an executive be rewarded simply for sticking around, as opposed to actually accomplishing something?

Why should an executive be rewarded simply for sticking around, as opposed to actually accomplishing something? $GME
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I am hoping the new board, which will be chaired by Chewy founder Ryan Cohen and includes several other former Chewy executives, will put a stop to payment for no performance. After all, GameStop is already being robbed enough:

Two dozen cars squealed up to a GameStop store in Emeryville early Thursday and their occupants smashed the front door glass, broke inside and rifled the store shelves, police said.
An unknown amount of goods, including collectible figurines, was taken from the store at 3980 Hollis Street shortly after midnight.

Dig into these posts for more on GameStop:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

Business, Podcasts

The Unstoppable Wave Behind Stocks

April 22, 2021 tremendousblog Leave a comment

In the last year, a torrent of money has flooded into Exchange Traded Funds (ETF’s) that track the stock market:

Over the last 12 months, about $650 billion has flowed into stock and bond ETF’s, a flow that’s unusually large versus history and may help explain why markets have been so strong.

Despite the attention to volatile stocks like GameStop, a far bigger firehose of cash is aimed at ETF’s. When investors buy ETF’s, fund managers have to buy the stocks in the index. If I buy an S&P 500 index fund from Vanguard, for example, Vanguard has to buy the 500 stocks in the index in proportion to how much of the index each comprises. This pushes up the stock market.

A big force behind this buying may be increasing personal income, partly due to COVID-related stimulus. With consumer balance sheets looking flush with cash, I expect this trend to support markets for the forseeable future.

Dig into these posts for more on markets:

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Photo: “Huge wave” by bluesbby is licensed under CC BY 2.0

Business, Technology

You Can Now Buy a Rolls Royce with Dogecoin

April 21, 2021 tremendousblog Leave a comment

Post Oak Motor Cars is now accepting dogecoin, a cryptocurrency that recently gained new heights of popularity following support from Tesla founder Elon Musk, as a form of payment. New Bugatti, Bentley, Karma, and Rolls-Royce vehicles are sold at the boutique sales location next to Houston’s only five-star hotel, The Post Oak Hotel at Uptown Houston.
This is the second form of cryptocurrency the Houston dealership has accepted. In 2018, Post Oak Motor Cars announced that it would allow customers to pay using bitcoin after integrating cryptocurrency processor Bitpay into its payment system.

More here.

Given the enormous price spike in the currency recently, I imagine quite a few holders are in the market for Rolls Royces.

This is the same pattern I saw with bitcoin: increasing acceptance in the real world as the price increases. I don’t own cryptocurrencies due to their volatility and lack of an income stream. That said, in the crypto market, dogecoin has long seemed like one of the better bets. Its market cap is a fraction of bitcoin’s, despite using the same underlying technology.

Its biggest disadvantage was a lack of acceptance as a form of payment, but that too is changing. Perhaps this coin has a lot further to run.

For more on dogecoin, check out these posts:

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Photo: “Mansory Conquistador Rolls Royce Phantom – Team 93 – Team Rolls Royce Austria” by daveoflogic is licensed under CC BY-ND 2.0

Business, Technology

The First Stock Trades On the Blockchain Just Happened

April 9, 2021 tremendousblog Leave a comment

Credit Suisse and Nomura just did the first stock trades settled via blockchain technology:

This week Credit Suisse cut some US equities trades with the Nomura-owned broker Instinet, using blockchain. This technology has been used before to verify other kinds of transactions. But these trades were a “first” because settlement occurred in hours and not the two days needed with America’s Depository Trust and Clearing Corporation, the industry-owned utility that normally settles stock trades.

This long settlement period is inefficient and costly:

“This is an incredibly inefficient way to operate,” Charles Cascarilla, Paxos’s chief executive tells me, pointing out that $15bn to $30bn of industry capital and twice as much liquidity are tied up in DTCC systems.

The two day settlement period was the key factor behind Robinhood stopping buy orders for GameStop shares earlier this year. The price had become so volatile that it could move against Robinhood a great deal in those two days. Given that, brokers insisted Robinhood post a large amount of colatteral. That expense was too great, so instead, Robinhood blocked buy orders for the stock. In a world where trades settled in hours via the blockchain, this would be much less likely.

However, blockchain technology is incredibly energy hungry. If we moved the massive volume of stock trading onto it, I suspect the energy needed might be prohibitive. I think instant, or at the very least faster, trade settlement is likely. But I expect that to happen via more standard computer systems, rather than blockchain technology.

I think instant, or at the very least faster, trade settlement is likely. But I expect that to happen via more standard computer systems, rather than blockchain technology.
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For more on blockchain technology and cryptocurrencies, check out these posts:

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Photo: “Crypto Kitties on Blockchain” by marcoverch is licensed under CC BY 2.0

Business

28% Of Americans Bought Meme Stocks in January

March 5, 2021 tremendousblog Leave a comment

I came across a shocking fact this morning: 28% of Americans bought a meme stock like GameStop or AMC in January:

Over a quarter of American adults say they bought GameStop (GME) or another viral stock in January, according to a new survey from Yahoo Finance and The Harris Poll.
All in, 28% of Americans say they bought one of these viral stocks, the Yahoo Finance-Harris Poll found.

AMC was the most popular, closely followed by GameStop and then Blackberry:

In relative terms, 35% of people who bought one of these stocks bought AMC, 33% bought GameStop, and 23% bought BlackBerry.

And they went beyond just buying the stock, getting into sophisticated and potentially risky strategies like options and buying on margin:

Meanwhile, 29% used conditional trading like a limit order, 22% bought call options, and 15% bought with margin — borrowing money to get in.

The people using these sophisticated techniques were largely novice traders:

The survey found that 43% of the people who said they had a brokerage account had signed up within the past month, an enormous uptick that matches Google trends results that showed that more people were googling “how to buy stocks” than ever before.

More here.

I see real risk if novice investors buy heavily touted stocks with debt. They could lose a great deal. And the more they lose, the bigger the push for regulations to stop such speculation will be.

For more on the Wallstreetbets phenomenon, check out these posts:

Check out the Stuff I Use page for some great deals on products and services I use to improve my health and productivity. They just might help you too!

Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

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Tag Archives: Trading

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

Over 57,000 Sign Petition to Ban Payment for Order Flow

New Data: AMC Fails to Deliver Down 85%

AMC Fails to Deliver Up 1088% in Latest Data

Wall Street Has a New Tactic in its Fight Against AMC: Options

Departing GameStop CEO Gets $179 Million Payout

The Unstoppable Wave Behind Stocks

You Can Now Buy a Rolls Royce with Dogecoin

The First Stock Trades On the Blockchain Just Happened

28% Of Americans Bought Meme Stocks in January

An angel investor's take on life and business