By Jenée Tibshraeny
The Financial Markets Authority (FMA) sees the GameStop saga as more of a game-changer than a one-off event.
Addressing a financial services sector audience on Wednesday, FMA CEO Rob Everett used strong language to address the issue.
“This weaponised use of options by retail investors may fundamentally change how US markets operate,” he said.
“The power of the crowd should be making hedge fund managers (and regulators) deeply uncomfortable.”
Retail traders, who initially came together on Reddit, have been purposefully pumping up the prices of shares that hedge funds have been running short positions on.
The most high-profile shares targeted include GameStop and AMC Entertainment - both listed on the New York Stock Exchange.
While a US phenomenon, thousands of kiwis have been partaking mainly through share trading platforms like Sharesies and Hatch. Interest.co.nz last week reported about 10% of trades (by value) made via Sharesies in the prior fortnight involved GameStop shares.
Infrastructure can’t cope
However, orders made by Sharesies and Hatch users have at times not been processed because the US clearing houses the platforms rely on to settle transactions have been overwhelmed.
These clearing houses have intermittently pushed pause on processing orders, as liquidity concerns have prompted their US regulator to require them to hold more collateral.
While Sharesies and Hatch have been copping flak from their users, they’ve been clear the matter has been out of their control.
Commenting on the situation at a high level, Everett said: “We’ve recently issued more guidance on this area and encouraged the online platforms to remind their customers of their obligations.
“More work will be necessary from us, from the NZX, and from the providers and advisers in this area to avoid disorderly markets or poorly informed retail investors staring down the barrel of a criminal prosecution.”
Tech + lots of cheap money + low interest rates
As for Everett’s earlier comment about the GameStop situation “fundamentally” changing how US markets operate, interest.co.nz ran this by a few people with trading experience: Gen X investment banker turned consultant - Raf Manji, Gen Y investment banker turned Bitcoin advocate - James Viggiano, and Craigs Investment Partners Head of Wealth Research - Mark Lister.
All three agreed the movement stemmed from technology giving a broader range of people access to markets at a low cost.
What’s more, all the stimulus provided by central banks and governments around the world means there’s more cash in the system looking for yield in a low interest rate environment.
Manji believed the GameStop phenomena wouldn’t change markets “at all”.
“Markets have always operated like this,” he said.
While he noted the short period of time in which GameStop shares have fluctuated was extraordinary, ultimately “prices always go up or down”.
Focus on the brokers and clearing houses
Manji said it was the clearing houses, or the engines that process transactions, that needed to be looked at as more people have access to high-frequency trading.
He said the issue was whether share trading platforms were explaining the hurdles that need to be crossed for a trade to be settled - from a user placing an order, to this being sent to an overseas broker, to it then being settled via a clearing house.
Viggiano, who trades Bitcoin full-time now, is critical of how traditional markets operate.
“There are so many layers separating the investor from the actual product,” he said.
“Retail investors have to go through all these filters and barriers and don’t get a seat at the big boys’ table because they’re not a big bank…
“There shouldn’t be this convoluted stock trading system that’s all centralised and controlled by the parties who have the biggest volume through it.”
Sharesies and Hatch have explained these layers to their users in writing in recent days. Sharesies on Thursday also hosted a webinar explaining its relationship with its US broker, DriveWealth (which Hatch also uses), and the clearing houses that are being made to hold more collateral.
The FMA doesn’t have direct jurisdiction over DriveWealth.
It and the NZX do however have regulatory oversight over the trading Sharesies does on the NZX. Sharesies does its own brokering for these trades (without the help of DriveWealth), so could be asked by the NZX to hold more collateral if trading volumes spike. Hatch doesn’t give users access to the NZX.
Will this self-correct or crash?
Lister didn’t believe the current battle between traders taking different positions on stocks would materially impact the market.
He said it was effectively a self-regulating situation - a portion of traders will have their enthusiasm curbed when they inevitably lose money.
He maintained the challenge for the FMA was preventing the masses from being burnt while not deterring them from investing.
Viggiano feared the abundance of cheap money, coupled with an appetite for speculation enabled by technology, would see the next “crash” scar millennials and Gen Zers in the same way his parents’ generation has been put off share trading by the 1987 crash.
He worried traders coming late to the GameStop party are the ones taking on the most risk with the least knowledge.
The movement’s "wallstreetbets" masterminds aren’t the amateurs they're portrayed to be.
"Their behaviour is not too far from the behaviour you see on the institutional side of markets," Viggiano said.
"We need to remember that most of the people on the subreddit are anonymous and some of them have more experience trading sophisticated derivatives like options than the average employee of a financial institution."
Final thoughts
Asked how this environment affected the way a more traditional fund manager like Craigs Investment Partners invested clients’ money, Lister said it remained focused on investing in companies with good fundamentals.
Yet the rise of the platform-using retail investor wasn’t something he ignored, as he was wary of how fads could affect share prices.
He noted how the inclusion of Meridian Energy and Contact Energy in major offshore exchange traded funds (ETFs) had boosted these companies’ share prices earlier in the year for example.
Looking at the bigger picture, Manji concluded: “We’re seeing the outcomes of bad quantitative easing…
“All we’ve done is create huge liquidity, lower interest rates and funded a massive asset bubble, which was easily predictable.”
It’s this devaluation of fiat currency that makes Viggiano - a free-marketeer - confident in his view that Bitcoin is the future.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
87 Comments
There's a perfect storm of events driving Bitcoin right now. Regulators are warming to it. Institutional investors are warming to it. Interest is once again at an all time high. And the fundamentals are still rock solid. It'll be the Ark of the financial flood that is QE, because it is diametrically opposed to those principles.
Solid as a rock eh? Good luck with that theory. It's been tried before -
https://theecologist.org/2016/mar/14/why-qaddafi-had-go-african-gold-oi…
https://www.cnbc.com/2021/01/30/the-indian-government-may-ban-cryptocur…
Bitcoin as a form of currency, used to transfer the value of different goods between parties as they trade is not an investment. Any buying into this, or anything else, purely to profit from the price differential in any period is not "investing" they are speculating, gambling, but not "investing". It is zero sum, it creates nothing, for some to gain others must lose. To date it has been a way for large entities to reap huge amounts from many smaller with no ability to retaliate on a steeply slanted playing field. I think the sooner we as a species get over considering this a good thing and to admired the better.
I agree, as a store of value bitcoin only has one advantage over cash, it cannot really be debased. The rapid rise of bitcoin is just an acknowledgement that Reserve Banks are rapidly debasing currencies in real terms. They are doing this because they are only looking at a small slice of inflation and ignoring assets.
https://chrisgimmer.com/bitcoin-reserve-asset/#:~:text=Portability%3A%2….
Do some more research guys, your arguments are so antiquated.
You mean the value of the Fiat currency against BTC goes down EVEN FASTER.
They are already losing value against BTC at an incredibly fast rate. The USD has lost 16% against BTC since the start of 2021. It's dropped 283% against BTC in the past 12 months. -10,000% in the past 5 yrs.
Why investing in Bitcoin could be the ultimate unethical investment - A summary of the below link for those who can't access it: When you buy Bitcoin there is a very good chance you are buying from someone who owns bitcoin because they are so dodgy they can't risk the traceability of being paid in cash.
https://www.nbr.co.nz/node/228922
Oh yea and your bank notes are totally not used for criminal activity. Actually only 0.34% of bitcoin transactions were used for nefarious activities last year. Criminals use untraceable cash, cash has no "traceability". Bitcoin is an open public ledger, where every single transaction since its inception has been recorded and distributed around the world. It is literally the most traceable digital item in existence.
https://www.forbes.com/sites/haileylennon/2021/01/19/the-false-narrativ…
And the direct link to Chainalysis' report referenced:
https://blog.chainalysis.com/reports/2021-crypto-crime-report-intro-ran…
Anyone who pens an article starting with the following close minded, highly biased opinion can immediately have all following (il)literature disregarded:
"The key argument for bitcoin becoming accepted as a safe store of value is that there is a limited supply of 21 million bitcoins in existence (only 13% more than the 18.6 million bitcoins that are *already circulating among terrorists, drug dealers, and hipster investors*"
So obviously I must fall in the Hipster Investor category, but one wonders which one Michael Saylor, the CEO of Microstrategy, falls into, considering his publicly traded company owns 74,000 Bitcoins?
The article is a very outdated FUD piece that is nothing new and has all been debunked. It contains a lot of "I would argue" and "I would suggest" conjectures with absolutely no supporting material or evidence present in the entire piece.
You need to expand your reading list to someone that isn't a gold owning, boomer fund manager with such a vested interest and closed mind.
I would highly recommend this short but informative podcast:
https://www.coindesk.com/podcasts/coindesk-podcast-network/breakdown-bi…
The banks and investment firms "weaponised" the entire financial system against the entire world economy before the GFC.
They claim to worry about my generation and the one below me being "scarred" by WSB's and Cryptos? Yeah right. Where was their worry when they were getting rich on CDO's squared?
Millennials and Zoomers have had our life wealth potential crippled, the safety of a pension fundamentally undermined and a lifetime of massive debt made inevitable, by the lack of FMA regulation. If you don't give people the opportunity for a solid financial stake in society they will look for alternatives.
The only thing I saw that was different with any of this was someone else was getting a piece of the pie instead of the people who are friendly with the person holding the knife - so they took their fork and plate away. Remember when a pre-loaded browser in Windows was enough of a suggestion of ant-trust to warrant full hearings involving Microsoft?
On point ginger. Add to that, it’s being driven by pissed off youths who’ve had their futures stolen from them with lockdowns, student debt etc with no job prospects insight. By using their stimulus cheque’s to band together on mass to play Wall St at their own game.
That is probably what happened Trader but it seems Wall Street got a good laugh in too when GME dropped by 65% just as quickly - bye bye cheque for the late arrivals. So far it's gone from a high of $350 to $50 (4 Feb close). Not hearing too much happiness atm. As usual the lemmings got BBQ'd
Well I'm not sure who the WSB crowd is that you refer to, but paying cheques to people so they can pay their rent, put food on the table and clothes on their backs isn't what I'd call a "Wall St bailout". Yes the Fed is buying some dubious Bonds atm, but the companies issuing those Bonds still employ people. What's the alternative? - no Bond buying/stimulus, mass unemployment and therefor massive Govt aid? Can't have it both ways
So finally a way presents itself for the little guy(s) to be able to come together to combat those big enough to just farm the retail chumps and there is a cry of dismay. Why now? that "weapon" has always been the one of choice by those in this business, ensuring that they would take the spoils . So by playing precisely the same predatory move the big boys themselves would play, a move designed only to take whatever they could get from as many as they could by sheer volume only they could command up to now. Now the great con cannot be played out without risk. Notice is given. Noticeably the response by the platforms is defer, delay, push pause, I doubt they would if it was flowing the other way.
Haha - nice riposte Frazz, but ultimately foolish. When you get some skin in the game you'll understand. Equity investment isn't driven by Facebook, Reddit, TikTok or any other BS social media trends. But as I said above - if you want to take equity advice from your Taxi driver or Groundsman - go for your life - it's your money
Isn't this just hyperinflation in asset prices? A rising tide lifts even the corpses of Zombie companies.
Reserve Banks conservative thinking, that is relentlessly pursuing RPI/CPI inflation through easy credit conditions for decades, has created a system prone to boom and bust that is now reliant on easing across the business cycle to sustain RPI/CPI inflation. Digital currencies are actually looking like the sane option to hold and transact if their wild swings in value can be addressed. Reserve Banks are out of control.
Manji concluded,“We’re seeing the outcomes of bad quantitative easing…“All we’ve done is create huge liquidity, lower interest rates and funded a massive asset bubble, which was easily predictable.”
Anecdote: Next door neighbours son just turned 18. Father didn't know what they should get him to celebrate his Coming of Age. So they gave him a $1,000 Sharsie Account.....
You cant beat them at their own game when they can change the rules wiht no consequences.
The only option is to opt out of their entire money printing fiat system and buy Bitcoin. No one, i repeat NO ONE, can change the rules and everyone is on a level playing field.
Remember, you buy Bitcoin at the price you deserve. Spend those few hours doing some research, it will pay off.
And a high proportion of Bitcoins are owned by the early movers who wanted untraceable cash - you buy Bitcoin, you've got a high chance of giving money to drug dealers, sex traffickers and arms dealers. I.e. Way better odds than a meat raffle that you're directly inadvertently funding terrorism or slavery. Great job.
But the fundamentals of Bitcoin are "We have masses of computers mining the blockchain, that could be used for other purposes like identifying cancer treatments or modelling climate change or literally anything else that isn't just mining blockchain." Sounds legit.
crank it up https://brrr.money/
Look pretty much like it did this time last year? Then....
But I guess we have even more 'free' money sloshing around this year, so what could possibly go wrong!
https://en.wikipedia.org/wiki/2020_stock_market_crash#/media/File:Stock…
I prefer https://brrrrr.money/ - it has more rrrrr's
These clearing houses have intermittently pushed pause on processing orders, as liquidity concerns have prompted their US regulator to require them to hold more collateral.
A situation that persists today and was the reason Bear Stearns and Lehman Brothers fell in 2008. In a world of collateralised lending its always about the quality of collateral.
Some history is in order:
Going Back Inside Lehman One More Time: An Important and Relevant Follow-up
A Nonsensical Jumble of Misused Words Requires Discussion
Vaccine Euphoria and Inflation Hysteria Obscure Dollar Problem
Let’s Talk Bills (again)
The most liquid OTR pristine collateral, US TBills are currently priced at 0.02% for the 3mth term.
NZ Government 3mth TBills were tendered at 0.236% this week.
No idea. What worries me more is that the key spokespeople for the bubble are so myopic about their systems and completely removed from the probability of financial instability. This is a huge concern. I know that their attitude is 'don't scare the sheeple', but wouldn't it be prudent to communicate that the risk is there, even if they can't identify the catalyst to set it off? It's quite similar to the Greenspan era when these people believed that their command economies could be managed with simple monetary settings. They thought they were invincible. Greenspan has acknowledged his limitations now, but you don't see that from the likes of Orr or Robertson.
Exactly:
Nobody buys securities; they borrow and claim to “own.” Repo. The hedge fund (client) says it wants to own XYZ US Treasury issue, puts up a minimal upfront investment, enough to cover some overcollateralization requirement, and borrows for the rest of the purchase price. In many instances, the broker is the lender as well as custodian.
To make this securities funding transaction as cheap as possible, the client will agree to allow the dealer to re-pledge or rehypothecate (for our purposes here, the language is interchangeable though in a legal and regulatory sense these terms can have different meanings) the very security the client is claiming to own.
What that means is the dealer acts as an intermediary rather than lending its own cash for the purposes of the client owning this particular security. Instead, the dealer will repledge that security in the repo market or to other dealers in order to borrow the cash ultimately used to “purchase” and then fund the transaction (rolling over) to its ultimate end. Not just a securities financing transaction, a whole series of them.
And this series becomes horizontal as well vertical; the already re-pledged security posted by the client’s dealer to the next dealer in line can be re-pledged again depending upon the conditions set forth between the client’s dealer and what is now the client’s dealer’s dealer. As you may already guess, the client’s dealer’s dealer may also be able to re-pledge – the same security – to its dealer; specifically, the client’s dealer’s dealer’s dealer.
In many if not most cases, there needn’t be the original client need for this chain of re-pledging, either. What I mean is, the first link in that chain doesn’t have to originate out of the client’s need to borrow directly; if permissible, the client’s dealer may re-pledge the client’s security(ies) for its own purposes, with the client being sufficiently incentivized.
Thus, a dealer who does this kind of business with many financial clients can build up a stash of usable collateral that it doesn’t exactly own; these securities belong to other firms and vehicles, but are more than useful for the dealer to fund and carry out its dealer activities as a whole because of these peculiar usage rights.
The permissibility of these kinds of doings is, and remains, much higher in the offshore domain (the non-harmonized part of these rehypothecation regimes). The more a dealer could do re-pledging for themselves, the better terms it would offer its customers; giving Lehman Brothers International Europe a serious leg up on Lehman Brothers Inc.
Net result, Lehman Brothers as a global firm had acquired a significant pool of collateral owned by its customers and custodied at Lehman Brothers International Europe which underlay a whole range of dealer activities carried out by Lehman Brothers Inc., including securities financing transactions in its own proprietary book as well as a creating a margin collateral cushion for a whole host of derivative transactions and potential counterclaims.
So, what happens when customers start to feel a little uncertain about these arrangements? Quite naturally, they may begin to wonder about what their exposure might be given how their securities are in London. In fact, this, not subprime mortgages, is what led to Lehman’s end.
Hedge funds and dealers as Lehman clients scrambled to change these prime brokerage agreements limiting Lehman Brothers Inc. from being able to transfer assets into Lehman Brothers International Europe, or demanding they be transferred back, having the effect of stripping Lehman of a huge chunk of what had been available collateral by which to supply its global operations.
The rest was typical, traditional bank run stuff; rumors of Lehman being shaky led to the initial customer collateral “run” which then made Lehman shakier leading to more customers running in and changing their brokerage language. Soon enough, bye bye Lehman.
It was a run, but it wasn’t like one Walter Bagehot or Benjamin Strong would’ve recognized. It sure hadn’t been something Ben Bernanke or any of his kind considered too important, either. The latter group, contemporary central bankers, focused instead on the level of bank reserves, even as the federal funds effective rate had plummeted and been undershooting for a year by then.
Not going to get into the technicalities of Lehman and co's demise but it's generally accepted the cause of the GFC was bundling and then trading sub prime mortgages which should never have been extended. Mortgagee couldn't pay ( they never could've), house foreclosed which couldn't be sold and the whole "house of cards "fell over. Remember the whole sub prime saga started in the US, not Europe. Caused in no small part by overzealous and predatory lending. Here in NZ we saw a small iteration of that in the "swaps saga", again pushed by the same types of lenders.
Yes, pledged securitised mortgage pools (RMBS&CMBS etc) collateral was no longer acceptable in the re-hypothecated repo collateral chains I noted above. Hence the demand then for the pristine variety we are witnessing in the US Treasury Bill market today.
I could add these debt security collateral types to those I have already noted.
The above sourced is from:
https://www.realclearmarkets.com/articles/2020/12/11/a_nonsensical_jumb…
Jeffrey Snider is not a believer in the simplistic subprime narrative. Have a read of the article his real clear market stuff is generally more followable without context.
You must have a different perception of the RBNZ's actual independence from the government and Orr's unforced dovishness to inflate housing lending to keep the GDP numbers up.
I think they (bank and government) will lower their collateral standards to try to reflate the market because they have no plan B, if house prices are threatened, I think it would take some pressure from the IMF (or BIS?) for them to grow a spine and actively crash it. The housing market would be just fine without the FLP right now, yet it was implemented.
I do see media turning against the excessive price growth so political winds may change and we get a new more hawkish governor but that's a couple years away, at least.
You must have a different perception of the RBNZ's actual independence from the government and Orr's unforced dovishness to inflate housing lending to keep the GDP numbers up.
I believe leveraged buying and selling of built housing stock to each other does not qualify to be included in GDP formulations.
Maybe not existing houses but new ones and improvements funded by (net) new housing credit do (at least indirectly, I'm not sure on the technicalities and it might not be 1:1). All the new construction jobs and residential consents will have been aided by new lending at lower rates.
The BIS seem to think "residential investment" qualifies as GDP.
...mortgage credit booms in advanced economies since the Second World War were increasingly associated with deeper recessions and slower recoveries.
...residential investment is one of the most volatile components of GDP...
My original source for this was Martin North from DFA but I don't remember the video.
Our post lockdown GDP growth was (partially) fuelled by the lending that led to our 20% house price growth. There will be consequences but most of those can be deferred till after the next election if RBNZ and government are lucky.
I never said it was an efficient use of our productivity or 1 for 1 with new credit creation but it does temporarily hold things together.
I'm definitely not advocating for this course of action (I think a housing market crash would benefit me and everyone in the long run) but I would think most Labour MPs are light weights who would be way out of their depth and too scared to voluntarily risk having to manage the housing market crash and would risk our currency to have a chance of avoiding this.
https://twitter.com/bernardchickey/status/1356432380282556416
Title is a little click baity, squeezing shorts have always been a sport eversince shorting exsisted. I'd would say just open all trading options to retailers. Let them freely trade options, CFDs, CDOs, CLOs, debt markets, junk bonds, treasury issues, warrants, hybrid warrants, sovereign bonds, municipal zero coupons, bankruptcy issues, exotic commodities and every single derivatives under the sun available to professional traders.
It's a free market- stop meddling with it, give people what they want.
There's a reason why other hedge funds aren't interested in squeezing Melvin's position but retailers want to pick up the lessons anyway.
I'm waiting for anyone to remind me for a third time how smart the Reddit kids are and how loyal the fraternity is and that they will buy and hold forever.
Nothing beats having some of their tution fees and welfare checks to contribute to my Chatlam excursion next month.
And Bitcoin? Don't make me laugh.
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