What the Tech? A look at GameStop, Algorithmic Trading and Beyond

By now everyone is aware of the epic battle involving Gamestop, hedge funds and WallStreetBets.

On the topic, I saw this video that speculated the role of algorithmic trading as one of the causes:

Based on that, I searched for any hint of algorithmic trading. The best I could find was the following:

"Some hedge funds likely hopped on for the ride, though. Many use what’s known as quantitative algorithmic trading, meaning the process is automated, allowing them to quickly catch any big waves.

"That's exactly what they do. They look at the momentum, and they look at the order size and the amount of activity and absolutely they ride that momentum,” Shelly said. “They're professionals, and they're experts at this business, and to think, long term, you're probably going to do better than they are is kind of a fool’s game.”

The question is how much of this amplification versus direction? Richard Coffin of the Plain Bagel, seemed to hint it is more of the latter rather than former. 

So let's step back and see what was actually going on. 

In any trade, there are always two sides to it. And so what are the two opposing forces in this saga?

This started with the hedge funds shorting 139% of Gamestop's stock:

"GameStop stock equal to 139% of its available shares has been borrowed and sold short, a bearish position showing mark-to-market losses of over $6 billion year-to-date, according to data from financial analytics firm S3 Partners. That figure is little changed since last Thursday’s 141% short-interest reading, even though GameStop shares have surged roughly 78% in the past two days alone."

The hedge-fund lost so much money that they had to get a $2.75 billion bailout from fellow hedge-funds:

"Hedge fund giants Steve Cohen and Ken Griffin are joining forces to bail out a fellow trader whose positions in runaway stocks like GameStop have been getting hammered. Griffin’s Citadel and Cohen’s Point72 Asset Management are investing a combined $2.75 billion into Melvin Capital Management, which has seen its recent bets on stock declines thwarted by a small army of investors with get-rich-quick dreams. The fund, run by ex-Cohen lieutenant Gabe Plotkin, is down 30 percent, the Wall Street Journal reported."

On the other side, were the now-infamous WallStreetBets (WSB) group on Reddit that started to push the stock up. This has been reported in the press from multiple sources. Here is a sample:

Bloomberg: "Give credit where it’s due. In their frenzy, WSB’s cocky hordes have managed to turn the tables in a game short sellers invented, spinning gold from the complacency of others. Before this year, GameStop was a cash register for bearish traders, who borrowed and sold more shares than the company issued. Hedge funds had been winning so long that they overlooked the tinderbox they were creating should sentiment turn."

WSJ: "Online forums like Reddit’s WallStreetBets are full of traders boasting that they are beating up the big investors who normally control the market. It is an ironic twist, or a sign of their lack of understanding, that they equate short sellers with the Wall Street establishment."

CNBC: "In the Reddit forum “wallstreetbets” with more than 2 million subscribers, rookie investors encouraged each other to pile into GameStop’s shares and call options, creating massive short squeezes in the stock."

Also, see Mad Money's Jim Cramer thoughts on this. The video also includes comments from Herb Greenberg, CEO of Pacific Square Research, who goes as far as to say this may be illegal. And this is quite rare to have such a crowd to get regulators involved. The point being is that this type of talk probably indicates the large institutional investors have been caught by surprise by WSB investors.

But is this solely about "momentum" or is there something more from the fundamentals side?

Chamath Palihapitiya pointed on CNBC, there are some disagreement on the "fundamentals" of Gamestop

What are those fundamentals? 

One is that (according to one analyst) that the sales of the Sony Playstation 5 would give GameStop a boost. The other, according to Bloomberg, was that there was new leadership on GameStop's Board:

 

"But some people think GameStop is primed for a turnaround. One of those people is Ryan Cohen, the former chief executive officer of Chewy Inc., the online pet-food retailer. If you can sell pet food online, you can sell video games online. GameStop does sell some video games online, and could probably do more of that and less with the stores in malls. Cohen’s investment vehicle owns about 12.9% of GameStop, which he started buying in August, when the stock was in the mid-single digits. In November he sent a stern letter to GameStop’s board of directors, reminding them of what a bad job they’ve done, asserting “that GameStop has the flexibility to evolve into a technology-driven sector leader,” and urging the board to try to do that. Two weeks ago, on Jan. 11, GameStop announced that Cohen and two of his friends from Chewy would be joining GameStop’s board. “Their substantial e-commerce and technology expertise will help us accelerate our transformation plans and fully capture the significant growth opportunities ahead for GameStop,” said GameStop."

And so that battle lines were drawn. 

According to Bloomberg, there were two things pushed the value of the stock upwards. 

First, since the hedge fund had shorted more than a 100% of the shares that exist, they really needed to buy back those shares. But once the shares started drifting upwards, the more they bought, the higher they got. This is what is known as a "short squeeze". 

The second was that the WSB investors used call options: "If you are a retail trader looking to gamble on a stock, you can buy call options to get leveraged exposure to the stock. For instance, last Tuesday (Jan. 19), you could have bought a $50-strike call option on 100 shares of GameStop stock expiring this coming Friday (Jan. 29). Bloomberg tells me this option would have cost you about $3.35 per share, or about $335 for a 100-share option contract; the stock closed that day at $39.36. If you sold the options on Friday (Jan. 22), when the stock closed at $65.01, they were worth $18.16 per share."

But it seems here is the key part that essentially enabled the WSB investors to use the options as asymmetrical warfare against the hedge funds. They bought so many call options that the "market makers" that sold them the shares had to buy the shares because of something called a "gamma squeeze", which Bloomberg explained as follows: 

"Meanwhile the market maker who sold you the options would have hedged its option exposure by buying about 40 shares of GameStop stock, for about $1,575. (This—the fraction of the underlying shares that the market maker buys to hedge the option—is called “delta.”) Your $335 of option premium caused $1,575 of stock buying." [Emphasis added]

In other words, the risk of the stock going up means that the market maker has to buy actual stock to hedge their risk. And so this caused the GameStop stock to go up. 

Also, tweets from Elon Musk and Chamath Palihapitiya (both billionaires) further assisted the rally of Gamestop stock.  

And this takes us back to the trading algorithms. They are programmed and designed to take advantage of such "momentum" and so that is a basic strategy of these bots. 

Although one can assume they played a role, it does seem that the WSB investors were able to find a chink in Wall Street's armour and drive a bus through it. 

This is not investment advice. 
So do not take it that way. 

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else

Stablecoins are now approved! But will they be used against China, Russia and beyond?

Wall Street Journal reported that the OCC has approved the use of stablecoins within the financial industry. Specifically:

"Banks are allowed to participate in public decentralized networks and use stablecoins in payment settlements, according to new guidance from a federal banking regulator.

The Office of the Comptroller of the Currency in a guidance letter this week said national banks and federal savings associations may use new technologies, including independent node verification networks—also known as blockchain networks—and related stablecoins, to perform bank-permissible functions."

The article also defined stablecoins as "a type of digital currency that aims to maintain a stable value and is backed by an underlying asset or a benchmark, such as the value of a fiat currency, or a basket of assets that could include investment securities and commodities. The OCC in its guidance said stablecoins can be used as a mechanism to facilitate payment activities, such as the payment of remittances."

Although things are expected to improve between China and the US with the incoming Biden Administration, the reality is that there is still a competitive rivalry between the two nations. 

As noted in Paul Vigna's and Michael Casey's Age of Cryptocurrency:

"Things really get interesting when the U.S. government issues a digital dollar. The dollar is already the world’s primary reserve and commercial currency, but this would give it an even bigger edge. That’s because people in countries whose currencies aren’t trusted or who are barred or restricted from buying foreign currencies—think China, Argentina, Russia—could now easily obtain the one currency that has long symbolized international stability. Whereas the international movement of paper dollars can be (somewhat) controlled with physical checks at border crossings and regulation of bank transfers, digital dollars would be far more footloose. They would invade other jurisdictions’ currency zones. If citizens of other countries can easily acquire dollars—by far the most sought-after currency in the world—and use them to buy almost anything, why would they need renminbi or pesos or rubles? In this scenario, other currencies become less sought after, the dollar more powerful. It is the ultimate expression of U.S. hegemony, and, for other governments, undermines their nation-state sovereignty." [Emphasis Added]

Foreign policy is but one consideration in driving the need for stablecoins. However, it is not one that is brought up often in these discussion and should be kept in mind.

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else

Data Tsunami: How big is the Data Deluge? (Part 1)

Was invited last year to speak about the Data Tsunami at the AICPA Engage conference, but I didn't quite make it there! Instead, I presented virtually. 

So, will be breaking out some of the topics that I will be discussing over a few blog posts. 

How big is the data tsunami?

Probably, the first thing that comes to mind is social data. The Internet truly unleashed the first torrent of the data tsunami. Google's search index alone is 100,000,000 GB. In terms, of social data we are looking at the following:

• Twitter: 200 billion tweets per year (Twitter)
• Facebook: 4 petabytes of data per day (WEF)
• WhatsApp: 65 Billion Messages per day (WEF)
• YouTube: 250 million hours per day (Variety)
• Apple: 50 billion podcasts downloads (Fast Company

It's interesting how the data tsunami encompasses print, sight and sound. This is of course lends itself to analytics, but we will discuss that in a future post.

In terms of organizational data, Walmart generate 2.5 petabytes of data per hour. According to American Banker, 12 million petabytes (per year) of data flows through the financial industry. In terms of manufacturing, 6,000 fan blades manufactured by Rolls Royce generates 3 petabytes. It gives an idea of how much data is generated by the millions of parts that go into airplanes, trains and automobiles.

In terms of medical data, Stanford published the following: 

“The sheer volume of health care data is growing at an astronomical rate: 153 Exabyte…were produced in 2013 and an estimated 2,314 Exabyte will be produced in 2020, translating to an overall rate of increase at least 48 percent annually.”

This obviously has tremendous privacy concerns. 

How big will the data tsunami get? 

According to IDC, "the collective sum of the world’s data will grow from 33 zettabytes this year  [2018] to a 175ZB by 2025". 

A couple of key contributors to this 'tsunami of data', will likely be the Internet of Things (IoT). 

IDC predicts that 40+ billion IoT devices will generate 79.4 ZB of data by 2025. The other generation of 'digital exhaust' will likely be autonomous vehicles, which according to Intel produce about 4 terabytes of data per hour. 

But the big question is so what?  

We'll take a look at this question in the next post. 

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else.