Come one, come all, to the greatest show on earth
Are you not entertained? Is this not why you are here?
The greatest show on earth is really getting good right now and to observe what is going on from a birds eye view brings a wry smile to my face.
Seasoned market professionals are bleeding from their eyes, clutching their P/E run sheets and staring open faced at their screens desperate for the market to behave.
Meanwhile home alone in front of their laptop, i-pad maybe even just their mobile phone a bunch of reddit reading, Nike wearing, TESLA driving, Tik-Tok dancing, tinder swiping, insta liking, Portnoy fans are having the absolute time of their life riding the roller-coaster of the greatest show on earth.
The impact of covid-19 is still being felt on the market but not really in the way most would have thought. As soon as sports was closed down and the initial shock of lockdown wore off the masses needed something to do. Las Vegas was closed but the stock market was open - and for years the financial markets have been working hard to democratise the stock markets by making it ever cheaper and easier for anyone with a chip and a chair to participate.
Markets are open systems as far as I’m concerned anyone who can and wants to should participate. The more the merrier.
The pro’s however are aghast at this - mainly because they are missing out on some of the rudest, most flagrant moves in certain stocks I have ever witnessed and the more it happens the worse it gets. Every day brings a new insane move - only yesterday a stock that most people hadn’t heard of back in march put in a eye-popping 35% gap higher - that only after it had about +200% move into their earnings over the last few months. “Priced in "??” I guess not!
I wont even mention Tesla ….. ooops
When people first started pointing their fingers at the Robinhooders saying they were moving the markets I had little sympathy for it as a plausible notion.
I have worked in trading for thirteen years now and can attest to how easy and hard it is to actually move a market and its all very situational. You could move a small cap stock very easily with only a small order and a very sloppy style of execution - do I think I could move Apple in any meaningful way ? No.
However do I think an army of day traders who all have a similar situation move a stock like Apple ? No …..but when the right set of circumstances come together I think its very possible. I think those stars have aligned for now- how long it lasts is anyone’s guess as its burning so brightly it will have to run out of gas sometime.
I heard a statistic once that said the average retail punter opens an account with $3k. So lets assume this number holds. Robinhood alone reportedly signed up 3 million new accounts in Late Q1 early Q2. That is not to mention all the other retail focused brokerage apps so lets just use this number of 3 million new accounts. Now lets assume these 3 million new punters are at home and bored due to lockdown and log into their easy to use app Robinhood.
Education is lacking amongst the average retail punter and in absence of a well funded research department to guide them in their stock selection they simply open up the first stock they now - lets call it Apple.
Lets say you have $3k in the account and you want to buy Apple - fine, but like its gone have to go up an awful lot for you to make sizeable return on your $3k - so you do a bit of investigation and decide on trading options instead, more bang for your buck.
When I buy one call option someone has to sell it to me. That someone who sold it to me is likely going to “delta hedge” some or all of the option depending on the delta of the option and the market making firm rules, I suppose. Its also likely this is all computerised and systematic so will simply happen as opposed to leaving it up to the discretion of a human.
So I buy 1 Apple call which is a claim on 100 Apple shares - the market maker, lets just for arguments sake hedges 20% of that so they buy 20 shares. (The market maker is now short 1 call option and long 20 shares) , I am long one call option with a “claim” on 100 shs in the future.
Now imagine if you will that of those 3 million new accounts only 20% of them actually log in to Robinhood today, thats 600k people and again lets say even 20% of those people have the same thought process as me - as indeed we were all reading yahoo finance, reddit or seeing periscopes from Dave Portnoy being blasted onto our twitter or insta accounts. No matter how we all came to the same conclusion that is 120k people buying 1 call option which equates to (120k * 100)= 12 million shares. The market maker then goes and hedges 20% - so 2.4 million shares to buy in Apple today represents about 5-10% of avg daily volume in Apple (pre-split).
5-10% is probably not enough on its own to have a significant impact on the price of Apple for any reasonable amount of time. But in this world we live in with HFT and highly engineered electronic market making machines all these orders hitting the market in the same direction throughout the day is enough to trigger a nice little bit of momentum in a stock -even if its the biggest stock in the world by a country mile.
I’m not talking crazy here either - see below from the Options Clearing Council website - stats for August show a +39% increase in equity option volume from this time last year. That should be pretty big in anyone’s book but it speaks volumes to me. I would have expected a large uptick in Mar/April based on the professional’s activity as market chaos took over - but thought it would have calmed down by now.
Go stand outside the offices of Citadel, Jump & Susquehanna etc next year around January also for some more evidence- there will be some happy faces.
Back in early 2000 I saw the same type of moaning and complaining. When Internet poker exploded and every Tom, Dick and Harry was going all-in with a A3 off suit and hitting river cards. Professionals around the world who had the game largely tied up and in their favour for so long looked grumpy and had too many bad beat stories from some chump with earphones and a hoody.
Its much harder to play something against someone when they do not know what they are doing, your strategy goes out the window. If you continue to play them over and over again its likely if you have experience you will indeed win in the end …..that’s if you have not gone crazy by that point. This period we are going through has certainly seen some bear graveyards populated, even more than they already were. The fundamentalists also are now grabbing their P/E run sheets and starting to go just a little too crazy.
Just remember the market is ALWAYS crazy - today is just a different kind of crazy. Adapt or get run over.