The volatile start to 2021—with some heavily-shorted stocks unexpectedly skyrocketing in late January—seemed to have subsided. But with some of these stocks again on the rise, we ask what factors caused this volatility, how likely it is to repeat, what could prevent this, and what it signals about, or for, markets. Allison Nathan, creator and editor of the firm’s Top of Mind report, turns to former SEC Chair Arthur Levitt, Wellington’s Owen Lamont, and Goldman Sachs’ co-head of Global Prime Services, Kevin Kelly, for answers.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This.
exchanges. Goldman Sachs, where we discuss developments,
We shape markets industry.
Yes and the global economy? I'm out
Nathan from common sacks research creator
the editor of the firms top of my report, which focuses on
economic issues on the minds of our clients. In this episode we
focus on the volatile start to markets and twenty twenty one with a number of heavily shorted stocks, unexpectedly skyrocketing and late January amidst the boom, and we
he'll trading. This volatility seems to have subsided somewhat, but many questions remain
what factors led to this volatility. Is it likely to repeat itself
Finally, given the increased activity of retail investors,
could and should be done to prevent similar episodes in the future. And what, if anything, does this episode signal about the broader market or mean for it? Exploring these questions,
is top of. Might we first turned to cabin Kelly Goldman Sachs CO, head of global prime services to break down the factors that led to the equity market value
quality and late January? What factors
Add to that the period of volatility that we saw
slept equities in January. So we have to remind the clock a bit too back in October,
where we start to see our prime brokerage adding to their long suppose, at a much faster rate than shorts, driven by the multitude of factors.
but deftly the positive outlook on earnings and fiscal stimulus. This was more pronounced
the wall Short merely
where we observe the longshore ratio, which we measure is class long market value divided by the short value hitting in
time high. At the
the two thousand and twenty?
we January. We also observed
why it's covering nearly five percent over you, a short book,
now. This was interesting to us as when we see that type of short covering in our portfolio. It's usually
a breed by long selling. Your laundry risky, which didn't happen Jaguar
I covering the shorts and not selling their long's. This lead
increase Longs exposure after being stretched into your at? With this backdrop,
over the first several weeks of January, we did observe when we look the prime brokerage performance, that Longs were underperforming performance while shorts,
but that in context as affrati gender, twenty second, our internal,
ass meant that we calculate with a brokerage bridge unlike performance
Did you two hundred fifty basis points of negative alpha perform its offset by three hundred basis points of positive data, which is realised that exposure to market that acquainted
positive fifty basis points for the month,
but then, throughout the week of January, twenty fifth
We observed exhilaration acceleration, poor performance all along and short side of our loss or type portfolios. When you look at our,
for Mister January S, away the basis we asked
there are long short funds without five point: nine percent
former lost. There was primarily driven,
losses on the short side, which we estimate was five and a half percent for the house.
much more modest loss alongside a point. Four percent must short flowed name,
in our most your basket, was about forty. Two percent of us is obvious
a crescendo and get your twenty seventh would perform instead,
seven percent for the month without observer
wisely risking by selling longs as well as coverage, shorts, thou
We observe the largest notional selling. We have seen since two thousand and eight this
risk. It was a majority of the U S story, but we all
what did cd risking in Europe and Asia
about leverage related to this episode idle,
that leverage played a material role in this bad about volatility and I'll, explain why
the community that experience of challenging performance was you
Longshore funds generally these
have rose exposure
is defined as law, market value plus short, not devalue, over equity or their energy of the fun of less than two hundred percent, so
more leverage for five six times. This is a modest leverage strategy where the pin point really came from was on the short sighted
it specifically concentrated shorts,
it wasn't much of an unwise given leverage. It was the performers degradation of shorts that lead to people do arresting and under perform.
Given the importance of short selling to these market moves, we then speak
you Wellington, management on the march, who published extensively on the topic. During?
higher academic career here,
down into short selling dynamics and the role they like me played during the recent volatility. Hot short squeezes work, and when do we typically
a short squeezes, usually defined as an increasing in asset price that causes existing short sellers to buy the asset
to close their sharp position? Maybe
do that, because they are trying to limit their losses
because they run out of collateral or some
is disrupted their ability to borrow the asset, so you ve got
this additional buying by four dollars that push up the price even more and
a process that may just happened. Naturally, or perhaps it's the result of deliberate market manipulation.
stream version of a short squeeze would be a corner in a corner,
Where somebody
control of the entire supply of the asset said
that too short sellers are forced to buy from that person? Who is controlling the supply in them?
you. The recent volatility, was the product of a short squeeze, but it differed from historical short, squeezing
an important ways. Would you
sit what occurred in the
equity market in the? U S in January to be the product of a short squeeze. Yes, there's! No,
that there were a handful of companies that were targeted at
short interest and
we saw a series of short squeezes in a smaller
we'll stocks in the. U S, starting
January and arguably continuing to track it similar
just history, like the picnic wiggly case these that motor case and books
in two thousand and eight one of the largest short
with this in history. That, for a couple days, left I'll, try
with the largest market in the world and that the peace
his moving, but not because of
new information about the fundamental value,
was different about January was historically a short squeeze as something that is done by a few large players, and here you had many
small traders I would describe
happened as a flash mob short squeeze
where you have a large number of small players or coordinating and social media? Also, in the case,
the Volkswagen, some people had to deliver both wagon chairs and they were able to
deliver the shares because of disruptions in their ability to borrow the shares. I dont
The destruction of these securities long market was the issue in January,
common. Is it to see these types of dynamics in markets beyond equities, most
historical examples
corners and manipulation come
from the equity market, but from the commodity?
market and other markets, the hundreds
corner of the silver market in eighteen. Eighty
another famous example, as these Solomon squeezed, which involve treasury knots
if a market of different institutions but the basic mechanism? Mrs it I've been asked the man about the role that retail traders
aid in the recent volatility and whether it
were height. Here's his take. I dont think that
impact of retail trade and has been over eight years ago.
Evidence that mutual trading has grown. There is evidence that
retail trading as a percentage of total equity market share as possible
we doubled in the past couple years and in the options
market reach. Our trading has exploded with respect to their
ability to access leverage
the options market. There is no doubt that that's part of the story and part of the buying power
of individual investors, has been through equity options on individual stocks. One way
describe. The events of January was a crowd sourced gamma squeeze gamma squeeze
means that retail investors are buying options and trading in there
he's market and the options dealers are hedging. Their exposure
buying shares so the way for the retail investors to magnify there
on the underlying surprised. Having put the later
market dynamics into context. The big question,
now is whether heightened retail trading activity, as well as the other factors that contribute
the late January events- I like me to repeat, and what that means for markets
in Kelly's new, it's difficult to say that
markets- have moved completely beyond these dynamics, but he believed
that shifts and positioning and awareness of this growing risk factor will leave heads.
And nimbler, and better prepared to anticipate and management
are the underlying dynamics that drove this episode still intact, or is it
likely that we're gonna see this conference of events again
I think it's hard to say we fully moved away from a dynamic, but at the time we were spectacle
the late January. Our sense was other form his challenges and be risking was most experience in big
from our? U s: angry Alongshore apply a base, which is
their confirmed by foreigners data from firefighters as well
other hedge fund strategies macro,
see a credit. Systematic many points.
the positive average returns the month of January and even
within the long short mainly in the EU, the performance
this budget was very high, with several managers actually pussy deposit returns for once and now, overall
risk is lower as positions the most shorted names. The newest has reduced dramatically, for example,
constituents, situations of short basket, clumsily sought covering as well
sixty five percent you're a date on a unit basis so today
Edward Alongshore managers on average have much less exposure to these days
and much less exposed to a sharp rally. A
every position, their portfolios to remain nimble? This new market, dynamic Kelly, also emphasised
is that, even with record breaking trading volume during this period, the market functions
from an execution financing and clearing standpoint,
Is there anything about this episode? Are
point during this episode where,
it seemed like the market wasn't functioning properly? No, the market.
should incredibly well as we discuss one of those days. We had a record data volume. Everything went
very well from an execution standpoint from a financing standpoint. Clearing everything was working well, so I,
The stability and fortitude of the market group is again during the last January, but Le Monde strategies
sure squeezes rarely happen and well functioning markets and
its concerned that market prices look less and my flight the outcome of an orderly process, so he believed
more volatile. Episodes are likely ahead. Here's the night
George squeezes are rare in well functioning liquid markets,
We shouldn't
have a market where prices are moving so much in response to sentiment. We should have markets that are more robustly
reacting to information and academic finance. We're
contact called noise trader risk.
traitor risk is where you have traders who are doing weird stuff and they're making market prices move all around, and these
national traders dont want to bear that risk. They just exit
that story, volatility
gets volatility and crazy prices and volatility or ourselves
enforcing cycle. So.
I'm not sure whether it's the liquidity, that's causing volatility today, the volatility that causing the liquidity, but somehow we're in a situation where market prices, at least
a handful of names, the amount of work
again words just me
It seemed like our system is more fragile. How
We are we to see similar episodes in the future.
I could imagine more squeezes, especially in liquid.
names or in weird.
corners of the market? I get it back
in flash precious we had a full.
crash into
ten and other little incidences than so. It seems to me that work in a market where
prices are moving a lot
probably not that horrible
couple stocks every now and then go crazy, but
more concerned about the whole system being fragile, finally, forward
active on the regulatory implications of the recent volatility we turned
Arthur love. It was chair of the efficacy from ninety ninety three
through two thousand and one I the internet bubble, levities parallel
between then, and now you
or chairman of the SSC during the internet ball. What,
similarities or differences? Do you see between the recent equity market volatility in that period or other
periods in your career,
abortion similarities,
between both periods
in both instances, people were shooting. I returns. They saw me upward momentum of the market. Rather,
fundamental analysis
the internet to hide starred.
Rooms or social media was price.
in both instances.
Trading, who is viewed as kinder than entertainment
the total divorce uprising, job fundamental research when you think about that
Yoda Volatility and the recent, when we experienced in January, do you consider it to be problematic,
Jody around in the gradual stocks,
driven by casino. I trading is a by product
the cultural extreme risk taking
shaking higher returns, and you can typically dead
like a global interest rates were a by product of liquidity,
I'd, say: liquidity is a problem
when chambers can't get any return on bank deposits, you're gonna do
as yield elsewhere and chasing. You is all
Firstly,
people need to be condition to respond.
Stability is a long term. Investment
we haven't had sustained period market week is chase.
Oh wait. No known and most
today's gay trading score in college. Yet at that time
the boy had been forced to all true
while Leonard, find some aspects of the recent volatility problematic? You think some areas of focus in turn
then what's been driving? This volatility deserve more scrutiny like on
trading platforms than others? Like short sellers,
in light of the testimony is a lot of focus was on retail trading platforms. Do you have any doubts about this
There is a low trees trading platforms, air part,
the fabric out?
Where did she go
Here is a brokers.
I've been told that their daily mail trades could three but
that's misleading.
The reality is that investors get nothing for.
workers get away a percentage of the difference in
the dead man, s grand trading platforms,
king. They returns that investors
The old saying goes: it shopping spree here,
the product-
Unfortunately, the trading platforms,
through start trying to,
may not always be getting the best deal they're now
as you said in your best entrance,
that's why we made it consider out at night
maybe in the market, more transparent,
acquiring those operating in mind.
Here we are in the best interests of their customers. The unrest
I also make we
your focus on whether trading platforms and using this
tools
social networking platforms addictive. There was also a lot
during this episode. Iron short sellers. How you view the role of short valley in the equity markets
everything. I an argument that short selling
is actually a way to supply shares to a market where more investors waterhole alarm,
Your narrow shares available
believe that is true
It's a way of allowing those who believe the stockings price.
To apply to India
a short while
Borrowing a shares. Your mouse plans
he had a long position, I believe,
that short, showing has
important role in ensuring proper pricing of stocks in the market.
Here there is a barrier to the last hundred years
selling should be banned.
Often those arguments come from a calculator,
the company is restored.
resolving prized
and being shorter
Enron, all that follow
two thousand and two
sure the stock
Van Ryan. Publicly, alerting investors
but I believe the stock was should neither can. We also applies
a little over a year later, the seventh largest
in America watching bankruptcy, revisions Le Monde,
We love it emphasising that despite a common perception,
short selling, generates market volatility. It's actually a stabilizing force in the market, but helps push at prices.
towards the fundamental value here is more, would limit
Do you find
the authority should be a good thing.
Or a bad thing for
a functioning market
I think, shorting is a good thing. It has
several roles, one role is,
short selling too
negative information into the market. So
optimists. Your pessimists, you want them to come together in a market to find them
the price and
an important part of our processors to allow them to trade on their views. Second function or
if it short selling, is liquidity for sellers
have to buy the asset eventually? And so, if you don't have short time, you're going to decrease market liquidity, how to stabilize markets
Friedman sat more than fifty years ago that speculation
is inherently stabilizing because speculators by low and so high
you think speculators are making money. You think their state
and prices ashore, sellers cell,
and they by lot. So they do it in a slightly different order. But they're doing the same thing: there pushing prices towards fundamental value is,
speculation necessarily stabilizing profit, making speculations gonna be stabilizing, but if you
people who are trading for reasons other than profit motive, their trade
Four fonder dared?
gambling her there.
Some sort of anti establishment feeling there they're trying to protein
somehow with their trade. That's not true,
when seeking, and you can imagine that kind of speculation would be destabilizing, but I would
that short selling is
a good stabilizing force
in short, sellers, are
Part of a well functioning liquid market in,
places where you don't have short selling or we're sure falling is temporarily and or restricted. Those places.
quickly out
duration about equality and prices are farther
environmental value
still remains. One of the recent volatility suggests a need for new rules or regulations love. It says that ball to episodes have happened in the past and will happen again, but
he struggled to define new regulations that could help protect investors from them.
obviously the million dollar question that Congress and regular
grappling with is whether any
paper regulation should be increased or implemented to help avoid some of these bouts of volatility
I don't think I could define new regulations, were they
The point you protect investors at this time.
of market volatility.
We soon period such as this before
I see them again.
it does not surprise me or worryingly, particularly the limit, does believe.
Tat. The new administration and incoming ACC chart very chancellor will be focused
and making sure that existing rules and regulations are still appropriate today. Any advocates happy
c c play a leading role in educating the public about the risks of investing.
Generally speaking, where emigrants
the administrations
the commission change to anymore,
aggression from an enforcement point of view,
that continues remain
was to be seen, but I think that
Gary guns or there's gotta be a strong action
for investors,
in Washington
extraction to ease up on
regulations, but markets are so sensitive
We ve been down most to these roads many times during market cycles,
Games were understand,
he said
his world was anybody in America
and where I lived in seeking out new corner
regulation, I take
Sure I'm you see is going to be cancelled.
We examining
setting, rules and regulations to see.
If they are appropriate for today.
These markets,
you never join.
back in a restaurant.
a string regulations that say goodbye
he's been done because monitored
we are constantly changing
I think
part of the responsibility of the head.
Yes, he seized and see to it that
regulations were to totally appropriate for periods.
in the past,
wait for the present time and I can't,
no one better that began to make various
judgments, because he is
through those markets in the past
You were great
expertise.
beyond regulation. What else could and should be? As you see I do in response to all this
The commission has to stand with the investing popular game, public markets,
it's important
a strange now that areas
on the day, a regulator. Looking out
their best interests
growth in retail trading may level off after people are able to return
the full time work in school
It will at last the next courage,
three historical pattern.
in one sense. Retail trade is good, the more
people involved in markets. The more they'll be
Chancellor tricky issue such as good
Good governance
You didn't ask me, etc.
People need to be condition to respond.
stability is a long term investment?
retail trading? Does
encouraged that education
regulators should went out
said the commission. I focused on
engaging the public. Can
you're kidding reinvesting public through
town halls the internet public space
Media
I don't think regulated realize they can and should use the boy I'll bet you
engage and educate.
I'll go as easy chair can do more with public opinion,
Sam
and from a rule, changes are
enforcement actions as making
new to grapple with questions following the recent volatility will be sure to keep tabs on
the implications for investors and for markets more broadly I'll. Leave it there for now. If you enjoyed this episode, we hope you subscribe.
an apple pie, cats and leave a rating or a comment. I am also Nathan. Things for listening to exchanges are common sacks
Are you next time this spot cows should not be copied distributed, published or reproduced in whole or in part? The information contained in this box ass does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or commercial
none of the statements or any information contained in this podcast in any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity,
Transcript generated on 2021-07-01.