{"id":216838,"date":"2024-12-30T09:45:00","date_gmt":"2024-12-30T14:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=216838"},"modified":"2025-03-21T14:26:02","modified_gmt":"2025-03-21T18:26:02","slug":"the-wild-robot-of-2024","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/short-selling\/the-wild-robot-of-2024\/","title":{"rendered":"The Wild Robot of 2024"},"content":{"rendered":"\n

The S&P 500 Index returned 50% over the past two years as euphoria over the transformative power of AI drove stock prices higher.  That is reminiscent of the stock rally of 1998 to 1999 which was propelled by the rise of the internet.  Our hope is that 2025 will not remind us of the year 2000, which started a three-year-long bear market.<\/p>\n\n\n\n

Many articles carried the theme of \u201cnobody wants to be short anymore.\u201d  That has not been the securities lending desk\u2019s experience at IBKR.  Many clients hedge their directional single-stock or options exposure with ETF\u2019s.  And the more they buy, the more they sell short to maintain their hedge ratios.  They are still being paid short credit interest<\/a>, but with the decrease in the Fed\u2019s target rate, that interest is now 1% lower.<\/p>\n\n\n\n

Then there are speculators who follow \u201cinteresting\u201d stories and trade rollercoasters.  Some of the most popular shorts for these clients in 2024 were:<\/p>\n\n\n\n

Issuer<\/td>52-week High<\/td>52-week Low<\/td>Difference between High and Low<\/td>Closing Price 12\/27\/24<\/td><\/tr>
Trump Media & Technology Group (DJT)<\/td>$79.38<\/td>$11.75<\/td>-85%<\/mark><\/td>$36.08<\/td><\/tr>
Lucid Group (LCID)<\/td>$4.43<\/td>$1.93<\/td>-56%<\/mark><\/td>$3.20<\/td><\/tr>
Vinfast Auto (VFS)<\/td>$8.78<\/td>$2.26<\/td>-74%<\/mark><\/td>$4.32<\/td><\/tr>
Canopy Growth (CGC)<\/td>$14.92<\/td>$2.66<\/td>-82%<\/mark><\/td>$2.78<\/td><\/tr>
Beyond Meat (BYND)<\/td>$12.12<\/td>$3.30<\/td>-73%<\/mark><\/td>$4.08<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

When we look back upon each trading year, we reflect on seminal events which required the most of our time.  They occurred in the second quarter this year.<\/p>\n\n\n\n

1. Volatility Monday<\/strong><\/h2>\n\n\n\n

There is an old Wall Street proverb: \u201cHedge when you can, not when you have to.\u201d  We were reminded of it on what we like to call \u201cVolatility Monday<\/a>.\u201d  On August 5th<\/sup>, The Cboe Volatility Index (VIX) jumped from 23 to 39, the largest increase since Covid and Volmageddon<\/a> in 2018.  The Nasdaq 100 Index dropped almost 3%.<\/p>\n\n\n\n

It was not a good day for short volatility strategies.  We know of at least one hedge fund which ceased operations.  Large market moves make for active days in trading departments.  The lending desk monitors and fulfills intraday requests to continue supporting clients\u2019 trading activity.  The risks of shorting<\/a> become more acute and extra vigilance is required of desk staff to manage them effectively.<\/p>\n\n\n\n

2. The Election<\/strong><\/h2>\n\n\n\n

The winner of an election is seldom evident before the night of the election.  The market is used to that.  But it dislikes uncertainty of whether someone<\/em> will actually be declared the winner on election day.  The 2000 election between Democrat Al Gore and Republican George W. Bush is an example.  No clear winner emerged.  The day after the election, the S&P 500 Index dropped 2.20%.  By contrast, it returned +2.61% twenty-four years later and kept running.  That was not only due to the perception that Republican Donald Trump would be business-friendly.  We believe that the market\u2019s spirits were being dampened by anxiety over an unclear outcome.  The removal of that possibility released those spirits.  We suspect that had Democrat Kamala Harris won with similar data points, the market would have taken it well.<\/p>\n\n\n\n

3. Year-End Financing<\/strong><\/h2>\n\n\n\n

Staff which deal specifically with client financing do not take vacations in December.  Many prime brokers ask their clients to \u201ctake off balances\u201d a.k.a. \u201cpay back the margin loan\u201d by December 31st<\/sup>.  Banks\u2019 reporting is based on figures from December 31st<\/sup>, and it is advantageous for them to lower the amount of money they lend to their clients because it will improve their liquidity ratios.  This affects hedge funds and other dealers the most.  Some ways to lower balances are to simply move the entire margin loan (and associated assets) to another broker such as IBKR, replace the exposure with options or futures and to sell SPX boxes to lower the debit balance.  The lack of cash supply causes new providers of financing (such as the options market) to charge higher implied interest rates.  Interest rate spreads over the Secured Overnight Funding Rate (SOFR) benchmark were the highest we had seen in years.<\/p>\n\n\n\n

We believe that a few reasons1<\/sup> contributed besides the usual balance sheet \u201cdressing-up.\u201d  In summary, buying begot buying. <\/p>\n\n\n\n