Any Other Business…

So you’re looking for something to write about for your first public column for a new publication – something that is current but maybe allows you to remind readers of how this thing works – thank you Reddit, GameStop, RobinHood…all of you.

In one swoop I can bash the equity market structure, take aim at a longstanding issue of mine and even have a crack at the lawyers! I was thinking it’s a shame that there’s no last look involved until I realised that a ban from trading is just an extreme rejection!

The ethical questions raised by events that saw retain investors organised on message boards to gang up on short sellers are many and have, inevitably, elicited as many different responses (often, as always, with vested interests behind them).

For those unaware, these message boards seem to have a hard core encouraging the masses to buy a stock that a short selling hedge fund has publicly shorted with the intention of squeezing the latter out of their position. This has created some hefty price action and required a couple of bailouts from parent companies, and while there are no doubt traders out there who have suffered at the hands of hedge funds shrugging their shoulders and whispering the word “payback”, it does raise an interesting ethical dilemma.

Is this activity market manipulation? Traders are deliberately targeting stocks of struggling companies who are publishing nothing remotely positive enough to warrant the meteoric rises we are seeing, the sole intention of the trading is to squeeze other market players until they have nothing left to give.

Alternatively, is this just a function of the market, where players have to take their shots, good and bad?

It is hard to pin down claims of manipulation when there are hundreds of thousands of people involved. After all, day traders watch business TV for tips from experts on which stocks to buy and no one seems to care that a stock goes up after, for example, a BlackRock analyst speaks positively about it.

The difference is, of course, that in the latter example, that analyst and their team has probably done some exhaustive research to come to their conclusion, in the main example of this column, someone has spotted that a fund is short and is whipping up thousands of day traders to put the pressure on. The fact that this collective is big enough to move the market is interesting enough, although I suspect what they are doing is using the algos’ apparent inability to differentiate between 100,000 buyers in $100 each and an institutional buyer (using an algo of course), buying a $10 million stake in a firm. The math is the same I accept, but generally speaking the $10 million buyer is likely to be there for some time, the $100 buyers are looking to get out as soon as possible.

I have to whisper it, but this is the result of a market that is too transparent, where what should possibly be confidential information – a firm’s trading strategy – is public knowledge because all trades are reported and disclosure laws leave little room for leeway.

The sole intention of this trading strategy is to squeeze other market players until they have nothing left to give…

There is another aspect of this about which I have strong views – mirror trading, for this is, to all intents and purposes, what is going on here. A few, supposedly successful, traders are posting to the masses about an opportunity (they’ll already be long of course) and then reaping the benefit as the followers mirror trade.

As far as I am concerned, mirror trading, if it is to be allowed, should have some seriously restrictive guidelines around when the trading information is released. I spoke to someone during my absence who mentioned they had been mirror trading but had stopped because of the slippage on the exit trade. Apparently, the trader they were mirroring not only took much longer to say they were exiting the position, but also had ‘favourites” who paid a few extra bucks to get the word first.

As the adage goes, “A fool and his money are soon parted” and if people want to go this route then who are we to stop them, especially in the case of the short squeeze forums, they are making money? As a short seller, a fund could sell, put the news out they have done so, await the bounce as the day traders pile in to squeeze them, and then sell the balance, thus crushing the day traders.

I am struggling to see how this is a good market model, where people are deliberately putting out misinformation? I may be being naïve but surely a market that moves on fundamentals, based upon solid information, is better than one where everyone is playing games? Not for the first time I stress that a good market model, for me, is one where actions and behaviours are transparent, but trading positions are not.

An interesting question is, could this happen in FX markets? I suspect not, because the market structure is less transparent and pinning down large positions is, rightly in my opinion, hard to do. There remains enough natural interest from hedgers to dampen the enthusiasm for even the largest group of retail traders to try to take on the market.

A good market model is one where actions and behaviours are transparent, but trading positions are not…

Having said that, in smaller, regional and emerging markets, who knows? There are Asian governments convinced that they were undermined by hedge funds during the Asian crisis, and while this is an easy deflection strategy on the part of politicians, there was no doubt that some firms led the way in some of the moves we saw. They were, of course, trading off fundamentals, which is something the politicians conveniently forget, but it could be argued, fairly tenuously in my view, that they were opportunists taking advantage of a specific situation.

It could be argued that these buyers are targeting stop losses in FX parlance, but that’s because they know where the stops exist, the information is pretty public; in FX it’s guesswork. Again, how about making some of this information less accessible?

The instance of platforms banning people from indulging in this activity really bothers me, because it’s doubtful they are doing anything illegal. After all, if you break it down the headline could read “[fill in name of platform] bans traders from buying stock”!

So, market manipulation? A financial markets’ Robin Hood? Ethical, unethical? An example of the democracy of open markets? I honestly am not sure, but on balance there is something about it I don’t like; it’s fraught with danger and you sense that it only ends one way – badly and with the lawyers involved.

colin@thefullFX.com

Twitter @colinlambertFX