As one might guess, I’ve been inundated with calls for my thoughts on the “bigger picture” implications on the current news of the day known as “Wall Street Bets” (WSB) and Gamestop™ stock vs Wall Street’s “Hedge Fund Elite.”
Below is a version of what I’ve been saying. It’s not all that complicated though it is a bit detailed. And for those of you that have been subscribers of the broadcast or following my work here and in other venues, you’re already well aware, and well ahead, of the vast majority. However, for those that may be here for the first time, or want a refresh, here we go. To wit:
Since the financial crisis Wall Street has automated the markets and replaced human traders with algorithmic robots known as High Frequency Trading or HFT for short. This “automation” is now fully installed and has been running on automatic for nearly a decade. This automation has culminated in Wall Street’s biggest (i.e. richest) firms to literally print money very similar to the Federal Reserve, as I’ll explain…
Many of these platforms (generic term for: algorithmic brokers, market makers and trading desks, etc.) have had years, repeat, years without ever having a losing trading day. This has been going on since circa 2010. You can read a few examples Here and Here and Here. Although they’re now behind a pay-wall, it’s the dates and headlines that are all you really need to know, for understanding.
Let’s begin with a little quiz just for some amusement, as well as perspective. Ready?
Guess what fundamental change took place in and around 2010?
You know, right after the entirety of the financial economy coming unglued due to Wall Street and its incessant risk taking using leverage and synthetic financial amalgamations which put the entire global economy into free-fall, which now sports the moniker of “The Great Financial Crisis?” Hint: Ben Bernanke’s now infamous Jackson Hole speech.
Answer: QE (quantitative easing.) AKA: Wall Street’s permanent funding and bailout program.
Now there are some that will say “Well, he really started in 2009.” To which I’ll say: Yes. I agree. However, it was that speech at Jackson Hole in 2010 that put the financial community on notice that the Federal Reserve would basically backstop anything and everything in one form or another should it see the need. Wall Street took that as an “All clear!” and the markets have been reduced to a casino metaphor ever since.
And for those that think this is hyperbole? May I remind you that it was in 2017 when it was found out that Wall Street was aware for years via insider information that the Fed. would keep its “pedal to the metal” all but ensuring their fortunes, which culminated in then Richmond Fed. president Jeffrey Lacker’s
forced resignation retirement once it was disclosed. Funny how things like that happen, no? But I digress.
Over this last decade I’ve been using the “casino” metaphor as to explain both the gyrations, along with the absolute obliteration, of anything resembling any true free market capitalization marketplace. I’m far from the only one. (e.g., David Stockman uses the term repeatedly, along with posting some of my own articles on his own site over the years)
This term “casino” was scoffed at by the entirety of the mainstream business/financial media. And every time the “markets” had a hiccup (Think: on par with melting down) where people like myself and others would explain why these machinations were taking place (i.e., the root cause being the adulteration of true price discovery via the Fed.) it was brushed off as being something other.
Hint: It wasn’t, and I made news to such when I wrote the following article back in 2014 “If HFT Algos Were People They’d Be Perp Walked” which coincided with the release of Michael Lewis’ book “Flash Boys: A Wall Street Revolt” (March 2014, W.W. Norton & Company™) for then, suddenly, even the FBI thought it was about time to open a probe.
So what happened in the end?
Again, hint: rhymes with absolutely nothing, to where these firms and their tactics, to literally “print money,” has gone on not only unchecked, rather, it’s lauded over by the same business/financial media that appears, once again, to have no idea of just what has happened and why in regards to Wall Street Bets and the stocks they’re targeting.
What’s worse: They (i.e., the same so-called “smart-crowd” either hosting or guesting on these programs) are all aghast at how these upstarts are suddenly goring their sacred cows.
The more I listen to their explanations – the more I feel like I did back in 2008 when I watched, read and listened to many of these same outlets where I foolishly regarded many of these “experts” (because they we’re on TV so they must be, right?) only to find they were even more clueless than I was.
The only difference between them and myself, at that time, was they had the jargon and could sling it like a child skipping a stone. And that’s all they could do. Period. To say it was an eyeopening experience or revelation would be an understatement. But that’s no longer an issue for me. But, again, I digress.
Since the financial crisis these algorithms or HFTs have been designed and paid for to basically work on a mathematical principle that no matter what happened – they won.
Playing and trying to beat Wall Street in a fair game (aka investing) has turned into much like trying to beat “The House” to use casino lingo. And it has been a losing affair, because every time your odds of winning favored 99.9% that you would win? The “house” would win 99.9% of the time, because that .1% chance in a 100 would miraculously appear nearly 100% of the time to favor, guess who?
It was and has been ever since a “We win – you lose, no matter what!” relationship. Or, said differently: an absolute destruction and perversion of the once greatest bastion for capital formation. They have turned it into a one sided, totally rigged and QE backstopped Wall Street casino showplace. My apologies to casinos everywhere.
How did they do this? Easy – they (Wall Street firms) paid the brokerage houses (Think Robinhood™ and others) as to be able to see their orders – before the markets did – and then front run them skimming minute percentages off each. However, when these minute percentages are added up, they add up to $Billions, upon $Billions, upon $Billions of profits to these Wall Street Elite Funds yearly.
Before this current WSB episode, there was no way to compete with both the size and scale of “The House.” No one person or group had either the needed capital required or even dared to try, because for all intents and purposes, most wanted to be part of this Wall Street in-crowd to begin with.
Then came “Wall Street Bets,” where the mathematical equation (aka We win you lose, always) showed its flaw in the .1% where the Wall Street can’t lose equation was turned on its head, because no one, especially the “Masters of the Universe” crowd never anticipated it. Here’s how…
Suddenly there were: six million+ traders, armed with nothing more than a trading app and a few hundred $dollars each, buying far out of the money, near dated call options (think expiring in a day or two, at most) for pennies on the dollar, in direct opposition to (i.e., betting against) the largest players on Wall Streets’ position via a hive mind mentality. e.g., in synchronized unison.
This “.1%” Wall Street elite always relied on the then assumed: They, and they alone, controlled all the capital and information anyone would need to muster as to beat them, therefore, they were unassailable. In addition: They also paid to see all the order-flows, as to front run them. aka reading the cards before they’re dealt, thereupon, they could always nullify any damaging effects or consequence, because, they would not only know about it before hand (i.e., pay the brokers to see the orders first) rather, no one basically had enough money to do it!
That is, till “Wall Street Bets” came along.
For they took Wall Street’s own model and rules and not only turned it on its head – but turned it against Wall Street itself in a way no one ever thought possible.
Here’s a generic, over-simplistic example to show just what WSB has suddenly brought to the “markets.” Again, this is for example purposes only and meant to be overly simplistic.
Let’s use this example: Six million (as been reported) WSB’ers x their $600 stimulus check (that’s $3.6 Billion when added together)
Here’s the math breakdown. (My math maybe off a bit because I’m having a hard time calculating on-the-fly all the zeros needed. So, let’s just say, since it’s hypothetical and for example purposes: I might be a zero or two off, which should also help to instill just how big this issue truly is.)
- 1 WSB’er armed with a $600 stimulus check, buying 12 option contracts for $50 each, totaling $600.
- Now – multiply that by 6 million WSB’s and it’s $600 x 6 million = $3.6 Billion of accumulated buying power.
- One $50 call option contract, no matter how near dated or far out of the money, compels the market maker to now purchase 100 shares of that company to solidify the transaction.
- Now take: 12 call option contracts per WSB’er (12 x $50ea. = $600) Multiply that by 6 million WSB’ers all doing the same: 6,000,000 x 12 = 72,000,000 call option contracts.
- 72,000,000 contracts controls 100 shares of individual stock per contract, meaning: 7.2 billion (yes that’s a B) individual shares of stock (72,000,000 x 100) now needs to be procured as to fulfill the transaction.
- If the targeted company’s share price is valued at, let’s say, $50 per share at the time the call option contract was entered, that would mean, $360 Billion worth of shares would now be needed to be purchased in one form or another. (7.2 billion shares x $50 = $360 Billion.)
- And now here’s the real issue: If Wall Street oversold the company’s shares, therefore, there were none available unless you were ready to pay through the nose? This causes a self-fulfilling feedback loop with WSB being the one’s in command.
- Can you say: Uh, Oh?!
To reiterate, this example is for simplicity, there are many ways through synthetic vehicle positions and more to facilitate how this is done. But to keep the example simple – no matter how it’s done or, in what size – in the end this is the basics for both understanding, as well as what is factually needed to take place. The size and scope that WSB is suddenly wielding in buying and position power is on par (if not greater) than any Wall Street firm, bar none.
Think about that for a second, and don’t let it slip by. The significance and implication – of just that one issue alone – is why, suddenly, Wall Street is coming unglued and its players unhinged, some literally.
This is why, unanticipatedly, WSB’s has ravaged the very fabric of Wall Street (not to mention their wallets). This is something no one ever contemplated or thought possible.
Theoretically, (if not literally) using market vernacular to describe: WSB is not just a new “whale” trying to outsmart Wall Street in their once territorial waters, but rather, is more akin to a never before seen “Killer Whale” hunting and purposely eating for sport what used to be considered the top of the food chain known as a Wall Street “Great White.”
This changes everything, and by that I mean just that: everything!
This stock (Gamestock™ for this example) was over-sold some 148% I’ve seen reported, hence, there were no shares to buy unless you were ready to pay up. And not paying up is not an option if you need the shares to stop (aka: close your short position) your bleeding out into insolvency. And this is where it caused a merciless run in the stock, because securities law dictates certain things must be done – and what ever that may cost another party is immaterial. Period.
This is why the term “margin call” strikes fear into Wall Street, because that’s what this feedback loop was feeding on.
Suddenly the “Masters of the Universe” were reduced to mere “pee-on” status as WSB relished in the reversal of status, perspective and buying power size.
And it’s not going to stop until it blows up everything.
It’s also quite possible – it already has – and we’re all just in that quiet moment before the structure gives way to the already explosive dynamic. Think: that moment when they’re demolishing a huge structure and that momentary silence just after the detonation, then – it all collapses upon itself.
Once again, I ask: Can you say “Uh, Oh?”
This is a calculation of odds that resides in the 0.000000000000000000000000001% side of the equation and Wall Street never considered arbitraging for it, because, it was seen as outright unfeasible, never-mind unfathomable. And yet?
May I introduce you to today’s version of Murphy’s Law now known as “Wall Street Bets?”
The reason why this could bring about far more calamity than many realize is the timing.
As I’ve been saying and writing these past few days: This past week and going forward is one of the most important periods for the “markets” in general, for they have to both adjust for a known crippled economy going forward, while under a new administration which, by all appearances, is rapidly signing not too business friendly executive orders.
Again, before the WSB or Gamestock kerfuffle became evident, it was clear what I was warning about was starting to manifest, demonstrated via Apple™ blow out earnings, not only not getting back to its prior highs, but selling off two, three, even close to 4% daily. Facebook™ the same.
This WSB wildcard is now something that will undoubtedly exacerbate all of it. Just by how much and how fast remains to be seen. But make no mistake – it’s an accelerant to an already smoldering issue. Not a first cause. Which is why as everyone tries (SEC, political et. al.) to deal with it – the main underlying issue will still take place. i.e., they’ll all be implementing and administering triage in all the wrong places.
The Hippocratic Oath for saying “First, do no harm.” will be eagerly jettisoned, or thrown out with the bathwater to borrow from another adage.
I myself will be looking for first clues on Sunday evening U.S. time as the futures markets open.
I would advise anyone wanting to keep abreast of the possibilities as to try and stay ahead of them to do the same, for I have a very sinking feeling we are going to, once again, be reminded of just how fast things can come off the rails using another metaphor that may suit the current circumstances a bit more fittingly…
Wall Street, along with many a regulatory agency et. al., may believe they can see light at the end of the tunnel resulting from all the supposed “restrictions” they put into place on the close of Friday. However, it just may be that that light is actually a runaway freight train in size and scale the likes they’ve never dreamed of, let alone seen.
And it’s headed directly at the “market” on a set of rails come Monday with a gleeful engineer and crew all chanting “WSB, WSB, WSB, WSB…”
As always, we shall see. However, there is one caveat this time I’ve not been able to apply previously. And it is this…
In regards to just how broken these markets have become via central bank largess, quoting Leonard Cohen. Now…
© 2021 Mark St.Cyr
Note: This is not trading or investing advice of any sort. This commentary is for “big picture” discussion purposes only. Please read, or re-read the “About This Site” page for any questions or clarifications.