It Wasn’t Just Small Investors Behind the GameStop Frenzy, Some Fear; Silver Market Jitters Are on Display After Reddit Options Frenzy

Jan 29, 2021

Observations & Insight

Editor’s Note: Putting together the Options Newsletter is often a feast-or-famine process. To bring value to the newsletter we are careful about what we include so our readers do not have to wade through a lot of junk. On the other hand, we want to be sure to provide our readers with as much information as possible and leave them to decide what they find useful. These past few days we are in “feast” mode with an abundance of stories. As a result this newsletter is longer than usual but still curated for your benefit. If you want to comment on this we’d be thrilled to hear from you and get your opinions. Interesting times…


The SEC released a statement today from Acting Chair Lee and Commissioners Peirce, Roisman, and Crenshaw about the “recent market volatility,” which begins: “The Commission is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days. Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes. Nevertheless, extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.”~SR


Keith Gill Drove the GameStop Reddit Mania. He Talked to the Journal.
Julia-Ambra Verlaine and Gunjan Banerji – WSJ
The investor who helped direct the world’s attention to GameStop, leading a horde of online followers in a bizarre market rally that made and lost fortunes from one day to the next, says he’s just a normal guy.
“I didn’t expect this,” said Keith Gill, 34 years old, known as “DeepF—ingValue” by fans on Reddit’s WallStreetBets forum and “Dada” by his 2-year-old daughter. He said he didn’t set out to draw the attention of Congress, the Federal Reserve, hedge funds, the media, trading platforms and hundreds of thousands of investors.

*****JB: Usually this section is reserved for our own content and comments but, occasionally, a story is better here than elsewhere in the newsletter. This is an interesting story which is of even more interest in light of current events.

Lead Stories

It Wasn’t Just Small Investors Behind the GameStop Frenzy, Some Fear
Jacob Sonenshine – Barron’s
Some investors have an upset stomach from the trading action of the past few days. Now others are wondering if Wall Street was behind the worst of it. On Wednesday, the major U.S. indexes fell more than 2% and had fallen almost 3% between Tuesday and Wednesday. In short, the volume of bullish call options on heavily shorted stocks surged. The brokers who write options contracts hedge the contracts by buying stocks, sending those stocks ever higher. The short sellers then must cover their positions by buying the shares of those companies back. In order to fund those purchases, those short sellers sold out of long positions in other stocks to raise the cash. That pressured the broader market.

Silver Market Jitters Are on Display After Reddit Options Frenzy
Eddie Spence – Bloomberg
Spot prices jumped as much as 3.5% to three-week high; Thursday saw a trading frenzy as Reddit forum targeted silver
Silver prices were whipsawed again, suggesting the market remains on high alert after a call by Reddit posters to create a short squeeze sparked sharp moves Thursday. Spot silver rose as much as 3.5%, as prices resumed an earlier climb after the dollar erased its daily gains. Silver futures also saw sizable moves, increasing as much as 6.3% in New York, and gold prices rose more than 1% in both London and New York.

*****JB: Also see Market Insider’s story, Reddit day traders look to silver as the next short-squeeze after being restricted from hot stocks.

Global Stocks Falling as GameStop-Fueled Volatility Won’t Stop
Barbara Kollmeyer and Jacob Sonenshine – Barron’s
Stocks were under pressure on the final day of a bruising week, with volatility fueled by a battle between U.S. retail investors and hedge funds set to continue.
The Dow Jones Industrial Average fell 329 points, or 1.1%, in early trading. The S&P 500 was 0.9% lower and the Nasdaq Composite dropped 0.8%. For the month, stock markets are mixed, however, with the Dow industrials down 1.1%, the S&P 500 off 0.1%, and the Nasdaq up 2.6%. The small-cap Russell 2000 was 0.2% higher Friday and has outperformed for the month as well, up 6.9%.

Reddit Stock Mayhem ‘Generated Substantial Risk’ for Brokers
Annie Massa – Bloomberg
Extreme volatility in stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. “generated substantial risk” for brokerages, imposing stricter requirements on the firms, according to Wall Street clearinghouse DTCC.

GameStop Bears Are Turning to the Options Market
Andrew Bary – Barron’s
Bears on GameStop continue to shift to the options market to avoid getting squeezed in short positions in the highly volatile stock.
Put option volume Wednesday totaled 1.19 million contracts, way ahead of call volume of 350,000 contracts, according to Susquehanna Financial Group, which makes markets in GameStop securities. Put open interest rose sharply to 1.58 million contracts from 1.13 million on Tuesday,

Duel Between Day Traders and Big Funds Spills Into GameStop Options
Joanna Ossinger – Bloomberg
A closer look at the GameStop Corp. options market shows another David-versus-Goliath battle, once again pitting large institutional firms against retail traders. Activity in bullish call options on the video game retailer’s stock looks concentrated in small short-term momentum bets, while bearish put options seem to be more long-term and likely the work of bigger players, suggested Susquehanna International Group’s Chris Murphy in a note Thursday. The derivatives strategist highlighted a drop in open interest in calls, but a rise in the equivalent figure for puts as the stock pushed higher.

Dow slides 200 points on concerns of retail investors’ speculative trading
Ben Winck – Markets Insider
US stocks fell on Friday as investors shunned retail traders’ speculative bets and disappointing vaccine data from Johnson & Johnson.
GameStop, AMC, and other Reddit-favorite stocks rebounded as day traders piled back into their risky positions. The highly volatile names have taken center stage in the market, and moves from Robinhood, Interactive Brokers, and other platforms to restrict trading have been met with calls for congressional hearings and reform.

Global stocks fall as day-trading frenzy feeds wider volatility
Hudson Lockett and Leke Oso Alabi – Financial Times
Shares on Wall Street followed European bourses lower on Friday, as an intensifying battle between retail traders and brokers over a handful of closely followed stocks drove up market measures of volatility.
The S&P 500 was 1.3 per cent lower by lunchtime in New York, leaving the blue-chip benchmark on track for its worst week since October. The tech-heavy Nasdaq Composite dipped 1.3 per cent.

Exchanges and Clearing

Robinhood raises $1bn from investors and taps banks at end of wild week
Michael Mackenzie, Eric Platt, James Fontanella-Khan and Philip Stafford – Financial Times
Robinhood, the online brokerage at the centre of wild trading in equities this week, has raised more than $1bn from its existing investors and tapped credit lines from banks to shore up its financial position after a turbulent four days.
The company has drawn down at least several hundred million dollars via a credit facility with banks led by JPMorgan and including Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo, according to people familiar with the move.

Increase of Position Limits for Certain Agricultural Futures and Related Contracts
CME Group
Pending all relevant Commodity Futures Trading Commission (“CFTC” or “Commission”) regulatory review periods, The Board of Trade of the City of Chicago, Inc. (“CBOT” or “Exchange”) will increase the position limits for certain agricultural futures and related options contracts as more specifically described in CBOT Submission No. 21-068 and in the proposed revisions to the position limit table found HERE effective concurrent with the March 15, 2021
effective date for the Commission’s final rule on Position Limits for Derivatives (“Final Rule”).

Peterffy calls Robinhood decision to allow ‘limited buys’ of GameStop troubling: ‘I’m not comfortable’
Mark DeCambre – MarketWatch
Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc., explained the rationale behind his brokerage firm’s decision to put restrictions on investing in companies like GameStop Corp., citing systemic risk as one of his biggest worries.
Speaking to MarketWatch on Thursday afternoon, Peterffy said that a so-called short squeeze can go on indefinitely unless someone intervenes, and it has the potential to ripple throughout the market.
“It can take down the entire system, theoretically,” he said.

LSE’s Schwimmer Expects EU to Give Clearing Equivalence to U.K.
Viren Vaghela – Bloomberg
London Stock Exchange Group Plc’s chief said he expects the British capital to remain Europe’s center for clearing trades, despite warnings from Brussels officials and governments on the continent.
David Schwimmer said LSE’s LCH unit, which cleared $1.1 quadrillion of swaps last year, remains a critical element of the European Union’s financial infrastructure even after Brexit. Given the prospect of business bleeding to New York instead of Frankfurt, he’s hopeful that the EU will extend access approval beyond June 2022, when a temporary transition arrangement expires.

Dividend Derivatives: Assessing the Impact of Covid-19
In 2020, an unusual year, pre-announced dividends were slashed or cancelled. Antoine Deix, Equity Derivatives Strategist at BNP Paribas, discusses the pandemic’s impact on short, medium and long-term maturities and what the dividend market may look like as a recovery gets underway.

Equity Trader Alert #2021 – 6 Nasdaq to Implement Enhancements to the Opening Cross Process
Pending SEC approval, effective Monday, March, 29, 2021, Nasdaq will be introducing enhancements to the Opening Auction process. Nasdaq is making these changes to increase the transparency and flexibility for firms participating in the opening auction price discovery process.

Regulation & Enforcement

Mobius Says Regulators Shouldn’t Act Against Reddit Traders
Ishika Mookerjee – Bloomberg
As authorities in the U.S. take a closer look at stock-market activity amid the Reddit-fueled surge in GameStop Corp., veteran investor Mark Mobius says he isn’t in favor of regulatory action against retail traders.
“There definitely should not be any regulatory action,” Mobius said in an email interview. “The regulator should only ensure that trading is done efficiently and fairly with all buyers and sellers (regardless of their objectives) treated equally.”

*****JB: Also see Market Insider’s story, Veteran investor Mark Mobius says regulators should ‘definitely’ not take any action against Reddit traders.

U.S. SEC will review actions inhibiting trading of some securities
The U.S. securities regulator on Friday said it would review actions that may “unduly inhibit” trading of certain securities and said it was closely monitoring potential wrongdoing amid recent price volatility in the U.S. stock market.
Securities and Exchange Commission (SEC) officials warned against illegal “manipulative trading activity” and said they were working closely with other regulators to monitor the situation after a wild week of trading during which an army of small investors have driven a dramatic squeeze of Wall Street hedge funds in shares of GameStop Corp and other hot companies.

EU opens up to US clearing houses in blow to City of London
Stefan Boscia – City A.M.
Brussels will allow US clearing houses operate throughout the EU in what could be a blow to the City of London’s largest clearing agencies. The European Commission announced today that it had decided that the US’ financial regulator’s rules was equivalent to the EU’s around clearing houses. This means the EU will now allow Wall Street clearing houses to operate throughout the bloc. This will likely be seen as a way to replace the Square Mile’s iron grip in this space, with City of London clearing houses only allowed to operate in the EU until June next year.

Why questions about asset bubbles like the speculation swirling around GameStop keep dogging the Fed
Greg Robb – MarketWatch
The Federal Reserve knows about asset bubbles. It has been living with the question since at least a cold December night in 1996 when Alan Greenspan publicly pondered about “irrational exuberance” in the run-up to the dot-com bubble.
Now the issue is front-and-center again for Fed Chairman Jerome Powell as stock markets have gyrated in recent days with headlines about astronomical gains for stocks with little or no business prospects.


GameStop shares may be up 350%, but investors love the 50-cent options
Saqib Iqbal Ahmed – Reuters
Wild gyrations in GameStop Corp shares have roiled Wall Street all week with plenty of chatter about every conceivable angle, but some traders have honed in on one question:
For a stock that has rocketed about 350% in five sessions, why is the most hotly traded options contract at the 50-cent level?

“GameStop effect” could ripple further as Wall Street eyes short squeeze candidates
April Joyner and Saqib Iqbal Ahmed – Reuters
The clash between retail traders and Wall Street professionals that sparked roller coaster rides in the shares of GameStop Corp may pose a risk to dozens of other stocks and potentially create a headache for the broader market, analysts said.
Market watchers identified dozens of stocks potentially vulnerable to extreme volatility after a buying spree from an army of retail traders in recent days prompted hedge funds to unwind their bets against GameStop and other companies, fueling surges in their share prices in a phenomenon known as a “short squeeze.”

U.S. Index Futures Slide Amid China Squeeze, Retail Volatility
Heejin Kim – Bloomberg
U.S. stock index futures fell, erasing gains from the previous session, as concerns over a cash squeeze in China and volatile retail-trader speculation sparked a broad equity selloff in Asia.
Contracts on the S&P 500 dropped 1.1% as of 8:22 a.m. in London, while futures on the Nasdaq 100 declined 1.4% and those on the Dow Jones Industrial Average lost 0.9%. A money-market rate in China surged to the highest in almost six years, reflecting tight liquidity in the financial system.

GameStop Surges Again. Here Are Some Numbers to Put the Move in Perspective.
Al Root – Barron’s
The GameStop short squeeze is becoming one of the most important stock market stories in recent years. The narratives are seductive: Retail traders versus hedge funds, Wall Street versus Main Street, free trading, and the democratization of finance as well as the intersection of the market and social media.
It’s all very compelling, but investors should note the drama is only affecting a thin slice of the overall market.

Wall Street Suggests Ways for American Airlines and Others to Cash In on Squeeze
Alexandra Scaggs – Barron’s
Only a couple of companies have said they are taking advantage of the blistering rally in heavily shorted stocks. Wall Street says it’s time for more of them to cash in.
So far this week, stocks of companies including GameStop (ticker: GME), AMC Entertainment (AMC), Nokia (NOK), Express (EXPR), and American Airlines (AAL) have been swinging wildly, driven in part by individual investors organizing on online message boards. Individuals who successfully traded the swings have reported sizable gains, and the volatility has put pressure on hedge-fund managers who were betting on declines in those stocks with short positions.

Amid the GameStop-led frenzy, Jefferies says ‘plenty of air’ to come out of riskier assets. Another strategist says wait to buy the dip
Jack Denton – MarketWatch
Markets are buckled into the fighting chair as another day of the retail-led feeding frenzy on shorted stocks is about to come online.
In case you thought the trading mania was a limited battle between internet day traders and Wall Street hedge funds: videogame retailer GameStop was one of the most traded stocks by value in the U.S. on Wednesday.


GameStop’s wild ride: how Reddit traders sparked a ‘short squeeze’
Ian Smith and Robin Wigglesworth – Financial Times
This week, the global stock market went down the Reddit hole.
A growing army of day traders has been a feature of the recovery in stocks since the sell-off last March, as a mixture of lockdowns, low interest rates and cancelled sporting competitions encouraged more and more everyday investors to try their hand at the equity market. This has accelerated since the start of 2021, as the Reddit message board, and its fast-expanding r/WallStreetBets community, have managed to channel the energy to a handful of previously unloved stocks.

Options Helped Fuel the GameStop Stock Squeeze. Here’s How That Works.
Jacob Sonenshine – Barron’s
Stocks enjoyed a powerful rally in January before they dropped a bit. Thank the options market.
From the second day of trading in 2021 through Monday, the S&P 500 rose 4%. Between Tuesday’s weakness and Wednesday’s selloff, the index had fallen almost 3% from its record-high. Sure, optimism on a continued economic recovery is still part of the picture. And sure, valuations now look stretched, which may factor into some of the selling. But it’s clear that the recent movements have been highly attributable to the options market.

How Options-Trading Redditors Fed the GameStop Frenzy
Wall Street is in an uproar over GameStop shares this week, after members of Reddit’s popular WallStreetBets forum encouraged bets on the video game retailer. WSJ explains how options trading is driving the action and what’s at stake.


Registration is open! – FIA Boca 2021

GFF Summit: A cordial invitation and some valuable information
Frank Ghast – Eurex
I hope you are all safe and sound and that I will see many of you at Clearstream and Eurex’s joint Global Funding and Financing (GFF) Summit 2021 from Tuesday, 2 February, to Thursday, 4 February 2021 – even if, unfortunately, only virtually this year. In the ramp-up to the summit, let me take the opportunity to quickly recap 2020 and take a look at what’s ahead.


Robinhood Users Suing Over Trade Limits Face High Legal Bar
Chris Dolmetsch, Christopher Yasiejko, and Christian Berthelsen – Bloomberg
Experts say brokerages get wide power to restrict transactions; Suits claim losses from blocked access amid share-surge frenzy
Frustrated investors who sued after getting locked out of trading in frenzied shares like GameStop Corp. aren’t likely to have much luck in court either. Online brokerage Robinhood Markets was named as a defendant Thursday in several federal suits demanding it reinstate trading of shares including GameStop, BlackBerry Ltd., Nokia Oyj and AMC Entertainment Holdings Inc. Just hours earlier, Robinhood, Interactive Brokers and others took steps to curtail activity in the high-flying stocks after several dizzying days of trading on their platforms whipped up volatility.

Stocks Drop, Heading to Worst Week Since October: Markets Wrap
Robert Brand – Bloomberg
U.S. equities extended their slump amid lingering concerns about havoc created by volatile retail trading. Treasury yields and gold gained.
The S&P 500 500 Index fell more than 1% and headed to its biggest weekly decline in three months as day traders’ bids for heavily-shorted stocks fueled speculation hedge funds would need to reduce their market exposure. Small-cap stocks outperformed and 10-year Treasury yields touched 1.10% after Johnson & Johnson said its one-shot vaccine generated strong protection against Covid-19, though it was less effective against the South Africa variant.

GameStop Frenzy Causes Glitches for High-Speed Traders
Alexander Osipovich and Gunjan Banerji – WSJ
High-speed trading firms that execute orders for individual investors faced technical hiccups this week because of exploding volume in GameStop Corp. , AMC Entertainment Holdings Inc. and other popular stocks.
Brokers that route investors’ orders to Susquehanna International Group LLP and Wolverine Trading LLC had difficulty connecting to the firms on Wednesday and routed their trades elsewhere, people familiar with the matter said.

(Podcast) TWIFO 234: Where Angels Fear to Tread
This Week In Futures Options – Options Insider Radio Network

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