Malt Liquidity 9
'Innovation' in investing, and in insider trading
Sometimes, being a Robinhooder isn’t so bad
Take note of the composition of ARKK, an “Innovation ETF”:
Apparently, innovation is 10% Tesla, and 6% Roku. But what’s weirder is, rather than just spending capital on public markets legging in to options trades on the tickers directly that would give you a custom blend of exposure, institutional investors are quite literally buying insane derivatives on this ETF:
The New York-based bank has sold $589,000 of structured products tied to exchange-traded funds from Ark Investment Management, the firm responsible for three of the hottest ETFs in the 2020 rally….
“Basically this is a sophisticated client’s YOLO call option,”
So apparently, the premium of not buying, ya know, actual YOLO call options is… longing a product that is doomed to go to zero?
According to a prospectus, the notes offer something that’s typically only available through custom derivatives: A package of three ETFs leveraged 1.5 times over a period of six years…
…while investors in the notes are protected against the first 20% drop in any of the funds, they start losing their principal after that.
These terms are borderline incomprehensible to me, and I feel like the level of sophistication of these investors is barely above the Libyan Investment Fund’s level. Thanks to Goldman, the (obvious) ruling in that case was that if you claim you are sophisticated and get grifted due to lack of knowledge, you have no case. Leveraged funds suffer from something called beta decay:
If I have an ETF that is levered, say, 2x to the price of crude oil, intuitively this means that if CL moves from 50—>55, a 10% increase, the ETF will move from 10—>12, a 20% increase. But CL is volatile! Suppose that the next day, it reverses its gains and goes from 55—>50, a 9.1% decrease, but ends at the same price as a day ago. The ETF, however, will move from 12—>9.816, an 18.2% decrease. Though the price of the tracked commodity has stayed the same, the ETF has eroded in that span.
So, naturally, when I see something say that it is tied to a leveraged product for six years, I see a hugely leveraged bet that Tesla will continue to run up for six years straight to outpace its decay. You might say “well, 20% of the downside is covered”, but in the example above, nearly 2% of the ETF decayed in a move size that has happened multiple times this year alone. As much as I hate to say it, if you really want to just lever long on TSLA and ROKU, skip the fancy inefficient leverage, and go straight for the options contracts.
Wright and Clark shouldn’t have done a CEB purchase
A consistently amusing recurrence is the busting of small-peanuts insider traders. Who could forget a fellow member of my graduating class trading on a merger he was working on for a measly 100k or Phil Mickelson flouting the ‘foursome’ standard?
For whatever reason, these small-fry insider traders violate the 10 Laws of Insider Trading in the least creative ways. This filing is no different: to summarize, brother in law tips off defendant about upcoming merger, defendant proceeds to purchase near term call options, a position that gives you zero room for alibi, inherently. But it gets worse! There were phone calls and text records even though the tipper and the recipient lived “less than two miles apart.” And to make things worse, Clark was the entire volume on multiple of his purchase days:
In 15 transactions between December 9, 2016 and January 3, 2017, Clark purchased 377 out-of-the-money, short-term CEB call options for a combined $33,050. Clark also directed his son to purchase similar options. On all but five occasions, Clarks purchases represented 100% of the option series volume for that day. On four of the five remaining occasions, the only other purchaser of those call options was Clarks son.
But, it still gets worse - not only is it extremely obvious to anyone with half a brain what is going on, Clark plowed all his money into the trade, and then some:
Clark undertook extraordinary efforts to raise cash for these purchases. On December 9, 2016, Clark sold all 407 shares of a unit investment trust in his wifes IRA account - the only holding in that account. Three days later, he borrowed $6,000 from a line of credit at his family credit union, nearly maxing out the $20,000 credit limit. On December 27, 2016, Clark took out a loan on his car. He used virtually all of this money to purchase short-term, out-of-the-money call options on CEB.
These cases aren’t particularly interesting and are open and shut, but it sort of highlights how little people understand about how much information about all your trades is out there. The same exchange information that helps catch a single person betting their entire net worth in a sure thing is also the same information that reveals when a large size order hits the market and impact the price - if I see large block orders hitting a low open-interest option market, I know that someone potentially knows something I don’t - an informed trader - and if I’m a market maker, I know to shift spreads to make sure I can hedge off price exposure cleanly.
Also, if you imagine the SEC reading out their statements with deadpan delivery, isn’t it just the best form of financial comedy?
Between December 2 and the morning of December 9, 2016, Wright and Clark communicated at least five times twice at their daughtersbasketball activities, twice by text, and once on a short call at 8:20 am on the morning of the 9th. 5.That same day, with CEB trading at $59.50, Clark purchased 60 CEB call options with a strike price of $65. Forty of the CEB call options were set to expire in January 2017. It was the first time in more than five years that Clark took a bullish position on CEB.
On that note…
Turns out, if you're ordering something delivered, you might not want to cook
The more deeply you look into things, the more you feel they're all nonsense
Is this the global financial equivalent of 'acknowledging your privilege'?
Notable opening in the naming rights to a Silicon Valley expansion franchise