Nomura’s McElligott On Neon Swans From WallStreetBets

“The Empire Strikes Back,” Nomura’s Charlie McElligott chuckled on Thursday, as platforms began to implement restrictions on trading in some of this week’s most heinous “offenders.”

Bloomberg, either oblivious to their own role in the madness or, far more likely, giddy at the increased web traffic they’ve garnered, continued to churn out near real-time coverage of every twist and turn in the tale of Reddit versus “Wall Street,” where “Wall Street” means whatever it needs to mean on a given day to motivate the retail masses.

“Retail platforms [are] restricting users’ ability to make new stock or options purchases in the offending names… which has contributed to an immediate meltdown in a lot of these ‘most shorted’ stocks… easing the squeeze, in turn helping send equity futures [higher],” McElligott remarked.

The story of the Reddit retail crowd engineering short squeezes and otherwise working collectively to push around misfit shares and hijack the price action in a handful of companies which are probably just as flabbergasted as everyone else, went mainstream Wednesday evening, as The New York Times, CNN, and others picked up on the drama. Politicians weighed in and Janet Yellen is “monitoring” the situation.

Read more: On Reddit, ‘The Show Must Go On’

This wild ride has played havoc. McElligott noted that Wednesday counted as “the largest one-day drawdown in Nomura’s ‘HF Crowded Longs’/’High Short Interest’ market-neutral ‘Exposure Gross-Down’ indicator” ever, going back some 15 years. The -6.37% drawdown was a -13-sigma move — a neon swan, as it were.

Nomura, BBG

At the same time, the one-day return in Nomura’s short interest factor was the biggest on record. At 6.2%, it counted as a 10-sigma event.

Trading Wednesday was “a pure risk-management exercise,” Charlie said, citing huge cash volumes and large end-of-day hedging/rebalancing needs for leveraged ETFs.

Obviously, the jump in volatility changed the calculus for vol control, at least temporarily. What would have been a latent bid in a rangebound market turned into an implied $10.2 billion sell flow from target vol, in true, unemotional/mechanical fashion.

The bottom line is just as McElligott explained on Wednesday morning, hours prior to the cash open in the US. “The cumulative multi-week destruction of short books had been of such magnitude that the losses via capitulation there finally began to spill-over into single-name longs getting forcibly de-risked,” he wrote Thursday, noting the large drawdowns for hedge fund longs, momentum, and FANG.

It didn’t help when Tesla’s results (after the bell Wednesday) underwhelmed. Simultaneously, Apple’s $100 billion quarter was nitpicked for the lack of guidance, and Facebook’s “uncertainty” wasn’t music to anyone’s ears either.

Read more: Facebook’s ‘Uncertainty’ And Apple’s $100 Billion Quarter

And, as is usually the case (in keeping with the tired, old “when it rains, it pours” adage) there was an insult to injury dynamic. “Recent crowding into VIX roll-down with traders taking advantage of incredibly steep curve/carry, thus specs short the front in size, versus the very ‘sticky higher’ back-end… got rinsed with a pretty hard ‘stop-out’ too,” McElligott went on to remark Thursday.

He noted that both VIX- and SPX- term structures inverted, while vol-of-vol “went crazy-bid.”

Needless to say, all of this seems totally insane to outside observers. Diehard fans will recall the following passage from “Bad Blood,” published April 5, 2020, during the lockdowns.

“What do you think about all of this?,” read a text message that materialized on my iPhone screen around 6:15 AM on March 23.

It was alarming. Nobody sends me text messages, let alone early in the morning. Besides that, it was annoying. As regular readers are aware, 6:00 AM is my cigar/espresso hour – interruptions are not generally welcome.

Through the pre-dawn mist on the back deck, the mechanical glow from the phone alert was hard on my unadjusted eyes. It was Nicci.

I met Nicci on the very island I now call home when we were teenagers. She was born here, and will always consider me a “tourist,” despite her having left, and me now being a property owner. She introduced me to bioluminescent tides before either of us were old enough to drink, but in that era, “age was just a number” when it came to alcohol consumption, so my first experience with a glowing ocean was amplified by cheap vodka.

As a teenager (and into her early twenties), Nicci was an idealist with a biting sense of humor – Ocasio-Cortez without the political ambition, if you like. As these things go, the flame of youth eventually flickered, giving way to a kind of dim, barely-burning candle. Somewhere along the way, she got into the restaurant industry and eventually became a sommelier.

On Wednesday evening, while leaning against the rails on the very same back deck, I got a text message.

It was just one word: “GameStop.”


 

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3 thoughts on “Nomura’s McElligott On Neon Swans From WallStreetBets

    1. I think you might be overwhelming the candle with sarcasm. Maybe that person of youth is still there, you just have to listen harder. Or maybe not.

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