Softbank bet big on call-options and Technology stocks are sinking.
So goes the latest big story. Business-reporting wants a whale, a giant trade that went awry. A cause for why Tech stocks just corrected (off 10%).
In reality the market today rarely works that way. Rather than one big fish there are a thousand minnows, swimming schools occasionally bringing the market down.
The same things driving stocks up unassailably toward the heavens, which should first have gotten our attention, often return them to earth. But we see no flaws in rising stocks. It’s the bane of trading – not knowing when to quit.
Back to Softbank. CNBC, the Wall Street Journal and other sources have the big Japanese private equity firm bet big on Tech.
Maybe it’s true. Softbank owned about $4 billion of Tech stocks in the last 13Fs for the quarter ended June 30 (the filings the SEC wants to make less useful, by the way).
Rumor is Softbank levered those holdings by buying call options, rights to own shares at below-market prices if they’re worth more than a threshold level later, on big Tech stocks like MSFT and AAPL.
Here’s where the story ends and market structure begins. The truth is the market neither requires a leviathan to destabilize it, nor turns on this colossus or that. It’s minnows.
A single trade for a single stock, coupled with an order to sell options or buy them, sets off a chain of events. Machines send signals like radar – ping! – into the network to learn if someone might take the other side of this trade.
Simultaneously, lurking mechanical predators are listening for radar and hearing the pings hitting a stock – MSFT! Wait, there are trades hitting the options market. Get over to both fast and raise the price!
Compound, compound, compound.
Prices rise. Retail traders say to themselves, “Let’s buy tech stocks! Wait, let’s buy options too!”
And the same lurking machines buy those trades from the pipelines of online brokerage firms, assessing the buy/sell imbalance. They rush to the options market to raise prices there too, because once the machines own the trades from retail investors, they are no longer customer orders. And the machines calculate demand and run prices up.
And index futures contracts rise, and the options on those. Then index funds using options and futures to true up index-tracking lift demand for options and futures, magnifying their own upside.
And then the arbitragers for Exchange Traded Funds drive up the prices of ETF shares to keep pace with rising stocks, options, futures.
And there are options on ETFs.
Every price move is magnified by machines. Up and up and up go stocks and people wonder does the stock market reflect reality?
The thing about prices is you never know precisely when they hit a zenith, the top of the arc. The last pump of your childhood legs in the playground swing, and that fleeting weightlessness.
And then whoosh! Down you come.
Did Softbank make money or lose it? I don’t know and it makes no difference. What I just described is relentlessly occurring every fraction of every second in the stock and options markets and there comes a moment of harmonic convergence after long arcs up and down, up and down, like children on swing sets.
We’re measuring these moves every day, with Market Structure EDGE. You can use it to see where your portfolio may be on that arc toward peaking weightlessness.