The financial system is far more broken than people realize.
I’m guilty of taking advantage of this myself, but it’s basically been free money for the last several months. Up until yesterday at least...
The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors.
That is a looooot of the market tied to a set of investors that cannot bet on anything else than up due to their own long term problems. At this point, the market is better viewed as a gigantic retirement fund/saving account than as a way to decide on price.
Once you look at the market that way, a lot more of the behaviours make sense.
> The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors.
Institutional investor != passive investment.
As long as trades are happening, there is some sort pricing mechanism.
Declining expectations for NGDP growth/uncertainty lead to funds searching for yield in the credit markets, leading to declining yields.
Bond yields declined prior to Fed intervention 
Basically we moved back to a renting society.
They would better reduce return than touch the principal.
This is a rent market. Not an investment one.
Rent market are more comparable to land value than to investment markets. Thibk of the use of corn as a relatively bad economic choice for profit but great for rent stability as an example.
That is what something like retirement and endowment need.
Sure but my concern is that pricing now looks less about fundamentals and more about the meta game of what other traders are gambling at the moment. What do you think about the price discovery mechanism for Bitcoin for example?
Bitcoin is operating under a great deal of uncertainty about its future prospects/the prospects of blockchain.
This idea would have more uncertainty for the investors, so they'd want a higher return than for a fixed bond. Taxpayers would be less likely to vote for the measure because it would have to raise their taxes even more than a standard bond.
(that being said, bond measures often take the form of "a 0.2% property/sales tax is to be levied for the next 20 years to pay off the bond", which is actually pretty close to what is being proposed by the GP. The difference is who is left holding the bag if tax revenues don't meet projections)
I looked back at gold vs stocks and the last time stocks and gold rose at approximately the same speed, was just before the 2008 crash.
It makes a lot of sense that investors would want to put their cash in the market and/or take advantage of low interest rates to lever up.
If you're willing to bet the dollar's going to crash in the next few years due to Fed policy, it makes sense to write dollar-valued IOU's today and use them to buy stocks and gold, knowing you'll be able to pay them back with cheaper-valued future dollars.
Don't know well about how US Feds and govt are incentivised
> [...] knowing [...]
These things are not the same.
And crash against what? Other currencies are faring far worse.
It'll crash one day. The world will change. Statistically speaking when it does it will likely be for the worse too.
You can read about how inflation is calculated, it makes sense: https://www.bls.gov/cpi/questions-and-answers.htm
I don't know anything about anything, but it seems to me this is a logical consequence of inflation? Purchasing power of $ goes down, prices (of everything) go up.
Like if all that new money isn't being used to buy things like food or even housing that factor into the inflation index than wouldn't we see something like this where gold and the stock market inflate because that's where the cash is going?
Now I'll buy the idea that isn't necessarily going to cause shortages and price rises in consumer goods, but the idea that it doesn't cause changes in asset prices is too much. Are these rich people supposed to be idiots? There is no return on cash and new money is being created at a fast clip.
Increasing money supply without any change in velocity or other exogenous factors is inflationary for asset prices, etc.
Real-life, however, is not a vacuum 
Inflation has been "stubbornly low" for 20 years while asset prices have outperformed historical averages the entire time.
Asset prices seem to have diverged from the real economy because assets are primarily funded with debt (real estate, corporate investment) which has been artificially priced lower, while goods are paid with earned income which hasn't been manipulated.
> Asset prices seem to have diverged from the real economy because assets are primarily funded with debt
Or maybe it's because with rising productivity, capital has become more valuable over time.
In fact it would mean that the only people who can afford assets are people who already have assets.
> "Or maybe it's because with rising productivity, capital has become more valuable over time."
We have 0.1% interest rates, negative in some countries, that indicates a glut of capital, not "shortage of valuable capital"
People incorrectly assume inflation means "the price of everything goes up". The problem word here being everything.
Why? Well because prices aren't merely dictated by supply, but rather supply & demand. Simply comparing inflated money supply to the good supply is naïve, as it ignores to factor in the demand for different goods.
As so, for a dumb example, it's entirely possible to have inflated stock prices but not see inflated sock prices, if all the extra money is chasing stocks, and not socks...
Because they've spent a few generations making sure people don't understand the difference between price inflation and monetary inflation by using the two interchangeably.
This whole sub-thread is a perfect example, "the Fed has been printing money like there's no tomorrow but, look, there's only 0.44% inflation".
So much like how the S&P/NASDAQ has a bias for growth because losers are swapped out for winners, the CPI basket has a negative price bias as expensive goods are swapped out for cheaper ones.
It's incorrect to refer to monetary inflation as just "inflation." If you're talking about price inflation, we're not seeing that yet - although 5 year inflation expectations are popping back up again 
So far, it's looking like the Fed is doing as best as could be expected.
Only true if everything else holds constant. Also, wouldn't just apply to asset prices but all prices.
Everything else, unfortunately, is not holding constant. 
Foreign demand for the dollar is at all time highs. People forget this and don't think about the impact that this has on currency prices.
Also, the "inflation is actually happening they just don't measure it right" crowd are delusional. Maybe they were right before covid, but they're extremely wrong now.
Was reading just the other day that inflation is actually underestimated right now.
People are buying basics, like food, at far higher rates than normal, prices for those basics are rising, but the CPI hasn't adjusted the ratios. Ergo prices are higher where it counts but the index doesn't see it.
In my opinion, continued inflation in financial assets will / is already partly causing inequality. It's not good for society if the middle class has trouble buying houses or real estate - it tends to lead to a lot of anger and political polarization, as we've seen.
Just because you don't understand why the market is priced a certain way doesn't mean the market is irrational.
Perhaps stocks went up because of the expectations generated by past Fed policy stances post-2008.
Interest rates are insanely low, which means putting your money in the bank, or in bonds, has a near-zero return. There are tons of massive funds (vanguard, etc) that have promised a return to their investors, and they're moving money from interest-based investments to other investments. This has caused a ton of money to be put into the stock market, which drives multiples up.
Why gold is going up:
The government is printing a ton of money to deal with the pandemic. This causes USD's value to drop compared to other currencies. There's a small (but real) possibility that the US dollar stops being the world's reserve currency. This causes people to seek value stores other than USD. This includes gold, bitcoin, euro, yen, renminbi, which are all up vs USD since the pandemic started.
These two things happening at the same time doesn't necessarily mean the stock market will crash.
Somethings are lost opportunities, eg: _today's_ lunch being provided by safeway + my kitchen vs a restaurant.
And no, this is not due to inflation (Which is near-zero). This is due to QE, and easy credit.
"Addendum: A small number of libraries apparently hold a transcript from a 1983 seminar during which Shilling reportedly employed the adage."
P=NP -> Markets are efficient.
But the scientific consensus so far is heavily biased towards the presumption that P!=NP.
To prove an "iff" you have to prove that Markets are efficient -> P = NP and P=NP -> Markets are efficient . I buy the first claim entirely, but not the second.
Let's assume P really does = NP, but as you've said "nobody has done that yet." Then, markets today must be inefficient, but that is T -> F which is impossible if P=NP -> Markets are efficient □
In lay words, how can it be true that `markets are efficient if and only if P=NP`, if it is possible that `P=NP but markets aren't efficient`.
Let me try an analogy for the if True case. Gravity (P=NP) exists, and always has. But we didn't understand it a few hundreds of years ago. Before we understood it, we didn't have interplanetary rockets (Efficient Markets). But we do now, and they were never outright impossible before our understanding of delta-v and other aspects. But before we had that understanding, we just straight up didn't have rockets.
Meanwhile if hypothetically gravity was, perhaps stronger or more pervasive over longer distances (P!=NP), it could have stopped interplanetary travel altogether and we would have never have achieved it.
We are just in an equivalent time period to that time in the 1600s before we understood, one way or another, what was ahead of us. If markets can be efficient in the future, they could always have been now and in the past. We just didn't have the tools to figure it out.
But I think what's more interesting is that
"Markets (present-day) are efficient -> P=NP" could plausibly be true, suggesting that the contrapositive is true: "P!=NP -> Markets (present-day) aren't efficient." Given current state of thought around plausibility of P=NP, that seems pretty powerful nonetheless.
With the slightly stronger statement "Nobody currently possess a polynomial time algorithm to solve a problem in NP -> Markets (present-day) aren't efficient" it starts to become quite likely markets aren't fully efficient.
Well, no shit. It said so right in the introduction. I think this is what’s called “theory induced blindness”
If everyone thinks stocks will go up, then the efficient market hypothesis would support a bubble.
It’s important to understand that efficiency is something that markets approximate. The EMH may be more “true” for you than for someone with a dedicated fiber line between the NYSE and the CME.
Here’s Burton Malkiel in more depth about what the EMH actually means: https://www.forbes.com/sites/quora/2014/06/13/what-does-the-...
"Bubbles" is not one.
But how do you know a bubble ahead of time?
If you just go with the trend most of the time, you take part in a self-amplifying hype cycle that pushes all participants' equities higher. Whereas if you try to "outsmart" the group, you will fail most of the time, even if you might be right in your skepticism, because stock prices aren't strictly based on actual objective reality, but more on the perception of reality by most market participants.
Every attempt at seriously measuring this, and there haven’t been many I’ve found that can be publicly shared , found close to negligible levels of broader-market effects.
$4bn in options buying, on the other hand, will do it.
I remember seeing a post on r/options this week about exactly this - large volume OTM calls causing MMs to buy stock and inflate price. This news has been very interesting in light of that.
I’m a former options market maker. Seeing large volumes of retail flow is very different from seeing a giant institutional order. It affects what goes into the market versus gets internally crossed and what gets hedged and to what degree and how.
Individual investors have a moderately bad track record day trading. They have an abysmal one with options. I’m a decade out of the business, but we almost always defaulted to taking retail flow at risk.
So basically, the individual investor is screwed because they can’t figure out institutional orders, but market makers can that allows them to hedge?
Consequently, as a market maker who wants to limit their risk if a trade goes sideways, optimal hedging for each looks different.
(Part of this is probably related to the distribution of orders. I've heard large enough individual flow tends to mostly self-average.)
Yeah, the problem here is that irrational picks by these people working from home are just opportunities for arbitrage by the institutional investors, who stabilize the price.
 - https://en.wikipedia.org/wiki/Pi_(film)
If we wanted a stock market based on fundamentals, it should not be a free market. Instead, the power to set prices should be left to qualified experts in each stock's industry, and stocks should be allowed to change hands only at those prices. The experts should come from both scientific and business backgrounds and not analysts who spend their lives on Wall St. and are so incredibly out of touch with technology. Unfortunately the reality of the system we have created is that the more knowledgeable you are about something, typically the less money you have, and the more money you have, the less knowledge you have. We need to reverse that.
> Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys, who would have distributed their picks evenly over the three choices.
This is a little different from what I was suggesting. Predicting the future is an inherently difficult task for experts and I'll give you that.
Rather I'm suggesting that experts set a valuation based on known facts about the company and the state of the industry.
Here's an example. I work in the self driving industry. I always knew based on state of the art tech that Tesla couldn't possibly meet their aggressive timelines of full self driving. I think it's realistic one day, but not on the timeline they claimed a couple years ago. However, the reality is that the public is duped into thinking they'll be on time, and so what happens? I have to base my investment based on what the public thinks of Tesla, rather than what I think of Tesla.
Here's another example. Uber car crashes. NVIDIA stock crashes the next day because the public thought it had something to do with NVIDIA GPUs. I, and all other ML experts should have been able to call this out and freeze the price of NVDA and say "we have it on good authority that NVDA did not do anything to cause that car crash".
The current way the markets work shifts the paradigm from "invest in what you believe in" (which I is the way the world should work) to "invest in what you don't believe in but what everyone else is fooled into believing in".
I mean, the incentive structure is such that I've even bought stocks in many companies I hate, and sold or put stocks in companies I believe in from my scientific background on first principles. Somehow that isn't the way things should work.
See, but you don't actually know that's why the price of nvidia fell, nor do you know that it is an irrational reason for the nvidia stock to fall. Just because you work in the industry doesn't make you an expert on pricing.
There's lots of problems with this idea (it's incoherent wrt supply&demand, why should people closely affiliated with an industry be the one's setting prices, prices should reflect future expectations not current valuations).
> Predicting the future is an inherently difficult task for experts and I'll give you that.
But that's exactly what prices do. Why would I buy any stock at all unless I'm making a forward prediction about what is happening?
That's exactly what I'm proposing we should change. We should be trading on a company's ability to make the world a better place. That would align incentives across people in a much better way than earnings reports. It also, incidentally, ensure that a company's profit structure is designed to align with its mission rather than align with some arbitrary earnings report deadlines.
I realize that metrics for this are hard to design, but we're in the 2nd millenium A.D. and it's okay for us to revise how we think about money.
I believe in a future of clean energy electric power, and it's f*ed up that I can't always invest in it because there are times when investing in oil gets me more $ that I can use to improve my own personal clean energy efforts while investing in electric would cause me to be at high risk of losing money, and therefore depend on oil because it's cheaper. That's a really messed up, convoluted system right there.
It's not just that the metrics are "hard" to design. It's a question of why would I buy stocks based on a company's ability to make the world a better place. What makes the "stock" piece of paper worth more when the company does more to make the world a better place. For real-life stocks, it's the expectation of future buybacks/dividends. For your metric, it's unclear why anyone would participate.
I'm precisely proposing that we change the incentive structure in a future version of the economy such that it would benefit you to invest in a company's ability to make the world a better place.
That would eliminate OP's problem, among lots of other things.
I'm proposing that the role of investors should be fully aligned with the role of scientists and engineers, and the incentives should be designed such that that is the case.
Captialism 2.0, if you will. It's a quarter-baked idea, and there are lots of questions to answer, but I'd like to kickstart and encourage more thought and discussion about a future revamped economic system that aligns incentives better than what we have today.
What you believe about Tesla evaluation based on Self Driving might not matter because even if they miss that timeline, maybe they execute on their scaling or batteries or whatever.
A huge company has many, many different things going and different analysts think different things matter far more.
So you would need a whole group of these 'experts' working together evaluating each aspect.
Now even worse is that expert don't just have hard time predicting the future, but are actually the worst at doing it in many ways. Tesla and electric cars being a perfect example. The amount of car insider that believed electric cars were absolutely not viable as a buissness was tiny.
Even worse is that even if assume you know that some technology X will not hold up to the companies claims, their should maybe still go up based on competitors. I don't believe that Tesla can do Self Driving in the time-frame they claim, but the news about the competitors is even more worrying.
Literally everything is connected in extremely complex way that no experts can understand. The temptation for smart people and expert to think they can is a deceit.
This is unlikely. More likely the stock crashes because the event can be expected to decrease public trust in and enthusiasm for ML in general.
Blame for a one-off-event in a specific market usually isn’t a big deal. Adverse consumer sentiment with long-lasting impact on your entire bottom line is.
Trusting the public to set valuations on a per-trade basis directly results in the heavy hands at the likes of SoftBank scooping up full control.
We were talking about banks 'making money' by giving out loans the other day. The banks actually have collateral and the fractional reserve. The only 'money' in the stock market is during active trading. Every penny of it leaves after the last trade is settled. At night the Dow is only worth the liquidation value of the companies (and that's if there are only common shares, otherwise forget it), and that's a smaller fraction than either the collateral or the fractional reserve banks maintain. Let alone both together.
Up until yesterday you could reliably hop on whatever the hivemind was interested and make some money. They even foreshadowed the market drop by mentioning the VXX before the correction.
It'll be interesting to see what happens in the next few days.
Not trying to be snarky, just honestly curious as I have seen very similar comments on wsb.
I've no dog in these fights btw. I don't actively manage my portfolio and have little interest in ever doing so. Though I do enjoy reading about the failures of those who do day trade with millions.
And being the contrarian isn't profitable except in rare scenarios. The dips this week were a minor pullback. Anyone who kept going short while waiting for this would've been insolvent by now.
Would love to see a comparison to hyped cryptos on /biz/
Lots of speculation that they aren't the only ones. The recent run up in TSLA looks suspicious as well; huge volume on way OTM call buying.
Here's a random reddit thread from months ago:
Even if the market let go a bit now - Softbank has literally cornered the market for so long - they still make a killing in the process.
a. creating more supply
b. signaling the stock price is overvalued.
Both of these things annoy those whose compensation is strongly tied to stock price performance.
> time to pay up.
I'm not sure what you mean by this. Are you talking about short squeezes?
Wirecard short sellers were "right" (as in their thesis was corect) for many years before the stock price reflected their beliefs. Some of them probably got squeezed (and quite a few got in trouble with various financial authorities).
This encompasses both direction and duration, so getting one of them wrong, is still wrong.
Reason #1: In investing, you can do everything right and still lose money. This is because there is never certitude, and you can only play the odds.
So, if you make a bet with a 90% chance of winning, and yet you still lose, was that a bad bet?
Reason #2: Most people like to think stock prices reflect reality somehow and the mechanism through which that happens is people buying or selling stock to reach price equilibrium. So, in that sense, a good bet would be one that pushes the price towards reality.
Earlier this week, I bought Tesla $800C’s despite the stock trading in the 400’s and sold for 300% returns later that day. I’m not one to day trade, but when opportunities like this are on the table it’s hard to resist.
Someone who does not give a shit can do a lot of damage without technically breaking the law.
No, no, no he doesn't. He has to be subtle so people don't realize what he's doing and pile in ahead of him and drive up the price before he has a chance to build up a position. It has nothing to do with "caring" about how he makes his money.
(Archive link: https://archive.is/fKzDr)
I mean just look at the spot VIX. It hit 38 at the peak of the crashing yesterday, and settled around 30 today.  0.3 delta option premium on S&P 500 index futures (/ES) is up 50% from a few days ago.
I have been researching this aspect of the options and futures market for along time.
Many of my strategies factor in the weight of when the derivatives markets are controlling underlying prices. You can often take advantage of how markets are formed, and stop using those strategies when something macro is occurring.
I used to trade butterflies back in the early 2010s for this, the max pain concept is based around this as well.
Its only funny that Softbank is the perpetrator because it is so large and full of dumb money whose LP's are recipients of money supply expansion. Thats a new scale for the options market.
Yesterday's drop you could see it coming 5-days ago but if you had gone in 5-days ago you would not be making money today, so it's hard to just time it that well. RSI was high, volume was drying, many other indicators.
Edit: To add let's not forget there was a huge run on Tech so everyone is re balancing. This is a BTD opportunity.
executed: BTO SPY 2020-Sep-09 340 Put @ 2.39 DAY
executed: BTO SPY 2020-Sep-09 340 Put @ 2.72 DAY
executed: STC SPY 2020-Sep-09 340 Put @ 2.90 DAY
At peak it was 40%, but I just needed the 10% to make up all my losses. Then I got onto calls:
executed: BTO SPY 2020-Sep-09 350 Call @ 1.82 DAY
Were up 25% today but I held them as the market is still strong.
STO = Sell to Open
When selling calls, you want to hold the underlying, else you're naked. When selling puts your coverage is cash
Think about this when you read a news article and they make a statement, what are this person's credentials? Since they are useless, go look at fundamental/technical analysis instead of media noise.
Edit: New TSLA position taken: executed: BTO TSLA 2020-Sep-11 490 Call @ 8.09 DAY
It took me a bit of time to realize you can make money “out of the money” with options.
Is there a good resource out there to help people like me who are an absolute beginner?
It's hard to define what a speculative position is. Incentivizing buying and holding would just be intentionally make markets illiquid, which a. let's bigger players take larger profits more easily and b. leads to inefficient pricing
> The cost of liquidity is instability (volatility)
Just research it. Liquidity doesn't cause volatility, it's the opposite effect: illiquid markets lead the real underlying price to be largely different than the market price, leading to massive jumps.
For example there may be a student who is good at Math who could become a PhD physicist or material scientist and develop new materials for medical application. Instead he is drawn to wall street and spends his career optimising "high frequency trading" algorithms and pricing options. Maybe he makes more money as an individual but society as a whole is worse off from the misallocation of resources.
Basically a financial sector that rewards non-productive work exerts a negative externality on society, particularly in terms of opportunity costs and mis-allocation of human resources.
Can you please not say stuff like that?
You're only calling it "free money" with the benefit of hindsight. And even then, it's still not "free", since you got a big 5% drop in one day.
"Free money" in a publicly traded market, yeah sure.
"Anyone could have seen that fall coming", again, yeah sure.
'Can you please not confidently project what is at best hindsight-bias? This isn't a palto alto meetup aka signalling-fest'
Buying options is still visibility, encouraging would-be traders to register on Robinhood and buy some amount of stock. For instance, my old college mate, a current PhD candidate, joined Robinhood and started trading around March. And of course, when he asked me for recommendations, I told him to play safe and go with the S&P stocks and resilient tech stocks. Then of course, he went full on WSB mode, and now he's "eating tendies while his wife is hanging out with her boyfriend".
Amazon's not a meme, and Tesla's not a safe bet.
I agree though that due to what appears to be a bubble, these investments aren't that safe at the moment. It appears that these type of stocks have benefited recently by retail investors entering the market and piling in. ( https://thehill.com/policy/finance/510796-are-trading-apps-p... -- though, as the article points out, the Robinhood investor bubble is smaller than the effect of the Fed's QE etc. ) Under normal valuation, Tesla at this point I don't think would be considered "speculative" -- risky, but not as risky as some. But a P/E ratio of 1000+ even after this recent dip is IMHO pretty difficult to justify.
r/wallstreetbets is pretty unreal to me -- many people are focusing on high-risk options on these heavily valued stocks, and (by the comments) appear to be putting a lot of their "eggs" in only one or two "baskets", to use the popular phrase. It's not ending well for some of them, judging from some of the posts.
The kind of options plays on WSB are insane tbh. I don't mind putting my eggs in one or two baskets, as long as they are stocks of steady companies, but options? No way.
From the equation, you can derive a series of rates of change one one variable with respect to another, often colloquially known as "the greeks", since they're all denoted with greek letters.
The first one to know is delta. It's the rate of change in the option's price with respect to the underlying asset's price.
Delta generally follows a curve, not a straight line. Gamma is the rate at which delta changes with respect to the underlying asset's price.
The reason why these are a big deal are because options traders often try to remain "delta-neutral" - they want the overall delta of their options portfolio to remain close to zero, which limits the effect of fluctuations in the underlying asset's price on the overall value of their portfolio. But that's a constant balancing act, because changes in the underlying asset price also change the delta of their position. A low gamma means that it changes slowly, and it's easy to keep things balanced. A high gamma means that they're sitting on an unstable equilibrium, and they're going to have to buy and sell more aggressively in order to maintain their position.
Your description is right(-ish) for directional traders.
1. Buy underlying shares.
2. Buy calls on those shares.
3. Market makers who sell you those calls have to buy shares in the underlying stock to hedge (they run balanced books)
4. Demand for stock rises, stock price and calls increase in value
5. Use proceeds to buy more stock and options. Rinse, repeat.
There's a potential for some seriously crazy non-linear feedback.
If your argument is abuse will happen anyways - why even bother having any financial laws?
If I buy 10 calls, the MM has to hedge. If SoftBank buys 100,000 calls, they just hedge more. How do you figure this is in any way remotely illegal?
Buying shares also raises the price of shares, should that be illegal too?
Essentially: most people intuitively think the stock market should be more heavily regulated than it actually is.
"investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity"
There's a bunch of examples here;
The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".
Well, I do.
Buying and holding call options is not market manipulation, full stop. Please provide an example of someone being penalized by the SEC for buying and holding call options without using insider information. You won’t, because buying call options is not market manipulation.
Is it market manipulation when Buffett announces BH bought shares of a company and then the shares skyrocket?
I never claimed someone was ever penalized by the SEC for buying and holding call options, just that buying derivatives can be a crime if it's done for the purpose of market manipulation.
That doesn’t change the fact that buying and holding options is not illegal...
Lots of things where once legal, which the majority of society came to deem as bad (slavery, child labor) - which we then came to make illegal.
But the problem here isn't just simply buying stocks, or holding options. It's the repeated process of buying both a stock and its options at the same time by a whale - and it seemingly does allow for manipulation of stock price. As so, why shouldn't such a pattern of activity be made illegal?
Not sure how this statement helps your argument. The same happens in pump and dumps. The people who artificially manipulated the price up in the first place sell in large, duping the latecomers out of their money, and the price corrects.
>Buying equities and options in large amounts is not market manipulation.
No it is not, but this isn't a simple matter of buying of equities and options. It's a pattern of repeatedly buying equities and options by one large party in a way which allows for potential manipulation. As so, even if such a pattern isn't illegal now, why shouldn't such a pattern be made illegal? Wash trades used to be legal before 1936, but we made them illegal for similar reasons...
Please explain how SoftBank was potentially manipulating markets illegally by buying shares and calls, I’m curious.
Now please explain why this activity shouldn't be made illegal, when wash trading is deemed illegal. Wash trading after all, involves buying stocks... yet it's illegal.
Wash trading is a way of buying/selling stock, (namely by one party at the same time), which can be abused to manipulate prices. Just like what is happening here is a way of buying stock and its options (namely by one party at the same time, repeatedly), which can be abused to manipulate prices.
Some patterns are illegal by the way. However proof is still quite difficult to come by.
For instance, it's market manipulation to place large orders continuously and then cancel those orders continuously.
It's also market manipulation to place both LARGE buy and SELL orders at the same time in order to fake volume for a particular stock.
However me as an individual or private entity can at any time go place an a LARGE as fuck order for what ever I want.
In fact if you look back and study old stock floors ect. traders started to learn what the people at the large banks/intuitions looked like. When they saw them walk up with their stack of PHYSICAL orders, they'd try and step in front of them because they knew the market was about to move as a large order was about to be placed.
No it doesn't.
Shares prices are falling today. People are selling. That means people are also buying. Every transaction has a buyer and a seller. Yet prices still fall.
Given low enough liquidity even tiny volume purchases relative to the liquidity can increase the price of a share.
On one hand, it's purely mechanical; it just works that way. On the other, it's hard to imagine doing it deliberately wouldn't be considered manipulation.
I’m not saying it’s illegal per se, but financial misdeeds don’t tend to get punished in the US, unless the victims are wealthy enough. See, for instance, the global financial crisis of 2008 vs Bernie Madoff.
In the purest sense, sure.
I bet there will be more to this story, and I think if insiders or associated holding companies are found to be doing so, it's at least a grey area.
Can you leverage buying a lot of calls or puts into making profit for yourself?
Now public companies could still restrict CEOs and other employees from profiting from insider knowledge. It could even be as simple as requiring employees to file disclosure filings before any stock transaction to level thevplayomg field.
Also, this works in reverse right? So Softbank is literally just creating a stock market bubble since the price rises are not built on anything fundamental?
If the stocks they're choosing have high gamma because there's a lot of short interest, then some of this increase could be shorts transferring equity to longs when they cover, which wouldn't be a bubble per say.
Historically low interest rates could also fuel this directly by providing extremely low interest capital and indirectly by pushing investors in general to chase yields in equities. That would be more bubble-like, but it also applies to other asset classes, and it's ultimately a function of central bank policy.
Gamma is the rate of change of delta w.r.t the underlying price. For example OTM calls have a delta close to 0. As the underlying price increases the delta will increase. When the underlying price reaches the call strike price (ATM) the delta will typically be 0.5. As the underlying price continues to rise and the call becomes deep ITM the delta will approach 1.0.
Gamma is how much the delta changes for a change in the underlying stock (i.e., the second derivative w.r.t. the stock price).
Market makers hedge their options positions by buying or selling the underlying stock so that they have no exposure to moves in the underlying stock (they are "delta neutral"). So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares. But options are non-linear and the delta changes with the stock price (again, this is what gamma is). If the stock moves up so that the delta increases to 0.60, the market maker will need to buy another 10 shares so that he owns 60 shares and is again delta neutral.
In this way, buying begets more buying and this is what people mean when they talk about a gamma "meltup".
If he does that he won't remain a market maker for long.
A single call option almost always is for 100 shares of the stock. So being short 100 call options, delta 0.5, would require being long 5000 shares to be hedged.
I'm sure you knew that, I'm just pointing out your typo for other less-experienced people here.
The first derivative “delta” is the speed at which the option price moves w.r.t the asset price. If the option is “deep in the money”, it’s almost 1 - any move is the asset price is essentially also the same move in the option price. If it’s deep out of the money, it is almost 0 - the probability of the option being worth anything is almost zero, so it’s value doesn’t change with price moves. It is 0.5 at the money (but i don’t have a one line intuitive explanation)
Gamma is the acceleration of option price with respect to the asset price. If the asset price grows, how will the delta (speed) change?
There aren't that many natural vol sellers (hedge funds, mostly? and implicitly the Fed), so MMs as a group have the function of converting implied vol into realized vol via their delta hedging activities.
But you are right that to you need to have the capital to face early assignment if you are short and the capital to take delivery if you are long volatility and liquidity is low relatively.
Yes you're absolutely right.
The beauty of being a market maker is you only need to hedge across the entirely of your exposure to a particular equity. The more different options you sell on a particular equity, the easier it becomes to hedge your net exposure.
>I’m guilty of taking advantage of this myself, but it’s basically been free money for the last several months. Up until yesterday at least...
I choose not to participate. It's broken as all fuck and I'm not going to be a part of it.
If you lack the cojones for such a mad strategy haha, you can always sell put credit spreads to define your risk at the cost of reducing your return.
Sorry I am a stocks noob but losing blood these past two days. Any help is appreciated.
A longer but excellent answer is here: https://youtu.be/9eDqmOPSs9Y?t=908
What does that even mean... lol
Rise != 'free money'.
Japan’s SoftBank, which bought options tied to around $50 billion worth of individual tech stocks.
Regulatory filings show SoftBank bought nearly $4 billion of shares in tech giants such as Amazon.com Inc., Microsoft Corp. and Netflix Inc. this spring, plus a stake in Tesla. Not included in those disclosures is the massive options trade, which is built to pay off if the stock market rises to a certain level and then lock in gains, the people said.
SoftBank bought a roughly equal amount of call options tied to the underlying shares it bought, as well as on other names, according to people familiar with the matter. It also sold call options at far higher prices. This allows SoftBank to profit from a near-term run-up in stocks and then reap those profits by unloading its position to willing counterparties.
So they are buying stock in tech companies, then compounding the bet that the stock price will go up by buying an equal dollar amount (in this case, corresponding to 11x the number of shares) of Out-of-The-Money calls. Then they wait for the price of the stock to go up, fueled in part by the Market Makers need to buy stock to hedge their exposure to the calls that SoftBank bought.
Once it's gone up, they then sell (presumably In-The-Money but at a greater strike price than they paid?) calls for more than they paid for the initial OTM calls. When those calls are excercised (because they are ITM) they sell the stock for a profit (price increase plus the premium of the covered call). Because they are buying large enough amounts of calls to cause the Market Makers to buy enough to increase the price of the stock, their strategy is more likely to work than it would be for normal investor.
One big unanswered question: do they sell their OTM calls before expiration after they increase in value? Or are they able to exercise them once they are ITM? I'd guess their goal is to exercise, since that helps them put more pressure on the MM's to hedge and while also letting them continue the strategy.
The reason this question matters is it affects how much stock is going to flood the market once SoftBank stops buying calls. SoftBank will presumably sell the relatively small number of billions of dollars of tech stocks they are holding at the right time, since they know when they'll stop buying calls.
Once the number of outstanding calls drops, then next thing that will happen is that the MM's will presumably sell their enormous hedge, causing the prices to drop rapidly. But obviously, the MM's don't want the price to drop until they have completed their sell off. Are they allowed to use the same strategy that SoftBank is using? That is, can they pre-sell a sufficient amount of (possibly discounted) ITM calls so that they can unload their hedge without affecting the price they receive? Or do they sell them on the market? Is there information available about what the MM's are holding as hedges?