Markets Archives - Page 24 of 26

November 25, 2021

The ‘Tesla-financial complex’: how carmaker gained influence over the markets

The rally in Tesla’s shares has lifted the overall stock market value of Elon Musk’s electric carmaker to over $1.1tn, making it one of the most valuable companies in the world. This year alone it has added almost $475bn in market capitalisation, equal to a Procter & Gamble, a JPMorgan — or two McDonald’s.

However, the real importance and wider footprint of what might be called the “Tesla-financial complex” far outstrips the company’s market capitalisation. This is thanks to a vast, tangled web of dependent investment vehicles, corporate emulators and an enormous associated derivatives market of unparalleled breadth, depth and hyperactivity.

Combined, these factors mean Tesla’s influence over the ebb and flow of the stock market is far greater than even its size would imply. It may even be historically unrivalled in its wider impact, some analysts say.

“We don’t really have the language to describe Tesla any more,” says Michael Green, chief strategist at Simplify Asset Management. “It’s like explaining to a person in a two-dimensional world the concept of ‘up’.”

Tesla versus the rest Leading car companies by market capitalisation ($bn) G1608_21X

The Tesla-financial complex is a phenomenon that many investors — whether passive index funds, traditional mutual funds, hedge funds or ordinary retail investors — have no choice but to contend with, given the idiosyncratic force it now exerts over the stock market.

“It stands out like a sore thumb,” says Dean Curnutt, the chief executive of Macro Risk Advisors. “It’s something you’ve got to pay a lot of attention to.”

One of Tesla’s oddest quirks is the fuel that has helped power its rocketing stock market value. Although its stock is wildly popular with many ordinary retail investors, the swelling size and hyperactivity of Tesla “options” — popular derivatives contracts that allow investors to bet both on and against a stock and magnify any gains and losses — has also flabbergasted many market veterans.

The nominal trading value of Tesla options has averaged $241bn a day in recent weeks, according to Goldman Sachs. That compares with $138bn a day for Amazon, the second most active single-stock option market, and $112bn a day for the rest of the S&P 500 index combined. This makes Tesla’s stock more prone to whipsaw movements, because of the “leverage” inherent in using options to trade.

Elon Musk, chief executive officer of Tesla — Chief executive Elon Musk has helped drive the valuation of the electric carmaker to over $1.1tn © Samuel Corum/Bloomberg

“The Tesla options volume has always been outsized, but it is now huge,” says Michael Golding, the US head of trading at Optiver, a firm active in the options market. “Tesla almost represents a generation. It’s come to represent innovation, at a time when option trading has taken off.”

The Tesla options market — more than 60 times as active as the entire FTSE 100 options market, and almost seven times greater than Euro Stoxx 50 options — has helped push US option trading volumes above actual stock trading volumes this year.

Tesla accounts for a big chunk of that aberration. In November options trading was 50 per cent higher than stock trading in nominal terms, and without Tesla and Amazon it would have been 20 per cent lower, according to Goldman Sachs. “The combination of a high market cap and extraordinary option activity make Tesla a critical driver,” the investment bank said in a note.

Golding estimates that historically the combined trading activity in US equity options has been between 10 and 20 times larger than activity in the biggest individual equity options market. However, there have been days recently where Tesla’s option trading activity has been five-to-six times the rest of the S&P 500 options ecosystem combined. “The size of the Tesla options market is absolutely enormous,” he says.

Bar chart of Average daily option volumes in three weeks up to Nov 15 ($bn, notional) showing Tesla dominates US options market

The value of options depend on what the underlying shares do, but due to their complex mechanics analysts say the option tail can occasionally wag the equity dog if there is enough activity in them, and even bleed into the broader stock market — adding to its churn and making it harder to navigate for many investors.

Curnutt points out that it is unprecedented to have such a huge stock that is also so volatile, and moves to the beat of its own drum. For example, the swelling heft of Tesla’s stock and options market is one of the reasons why the Vix volatility index has diverged so sharply from actual US equity market volatility lately, he argues. “Tesla is its own animal,” he said. “It changes how markets price risk.”

Who will bet against Tesla?

Ordinary retail investors have been the primary power behind the Tesla options boom, but some of them have more resources to make bigger leveraged bets on Musk’s company than others.

IT billionaire Leo KoGuan recently said that he had by early November accumulated almost 7.2m shares in Tesla. They had largely been accumulated through aggressive purchases of Tesla call options — which give buyers the right to buy shares at a pre-agreed price within a certain time period — and offer a popular route to boost gains. Bloomberg previously verified the growing size of his direct equity stake and options investments, and in September, Tesla’s investor relations head Martin Viecha confirmed KoGuan’s original claim.

That would make him Tesla’s third-biggest individual shareholder, behind Musk and Oracle co-founder Larry Ellison, with a stake worth almost $8bn, and has made him a hero on Reddit forums dedicated to the carmaker and trading. “Leo KoGuan = Tesla God”, one thread declared.

“He’s trading a lot of options, we can definitely see his footprint in the market and he’s inspiring others,” Golding says. “It’s almost as if he’s waving the Tesla flag and people on Reddit see him as someone they can follow.”

US option trading volume has vaulted above equity trading volumes GM201124_21X

Tesla’s fame and the volatility of its stock have also started to make it a component in some structured investment products, such as “auto-callables”, further enmeshing its shares into the fate of the broader financial ecosystem.

Auto-callables are complex savings vehicles — particularly popular with Asian investors — where bankers construct an attractive, bond-like fixed return by selling stock options. Historically they have been mostly options on broad stock market indices such as the S&P 500, Hang Seng or Nikkei, but because of falling market volatility some bankers have started to structure them with options on choppier individual stocks. Tesla has emerged as a popular choice.

“Tesla is perceived as safe because it is big and at the technological vanguard, but it’s incredibly lucrative [for investors] to put into structured products because it is so volatile,” says Simplify’s Green.

The frenetic rally in Tesla has also buoyed money management groups such as Cathy Wood’s Ark Invest and Baillie Gifford, which have bet heavily on the electric carmaker. But there is a flipside. Its gains have left a huge and growing blot on the performance of many other investors with only negligible or modest positions in Tesla relative to its big heft in their benchmarks — or “underweight” in market jargon — due to what many see as its wildly inflated valuation.

US mutual funds focused on growth stocks suffered their worst bout of underperformance in at least two decades in October, largely due to the carmaker’s rally. For US mutual fund managers as a whole, Tesla alone crimped their relative performance by 0.46 of a percentage point in October, according to Wells Fargo analysts, helping turn what was heading towards being a decent year into yet another mediocre one for stockpickers.

A scatterplot showing average daily share volume and option volume, over one month, for largest US-listed stocks (market cap>$100bn), as a {21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} of shares outstanding

“Managers that have been underweight Tesla have certainly been punished,” says Drew Dickson, chief investment officer at Albert Bridge Capital. “It’s been a sizeable driver of underperformance for many. You have to wonder whether a lot of them are now holding it simply due to fears they’re going to lag.”

Betting against Tesla has been particularly painful. Hedge funds that have shorted Tesla shares over the past decade are sitting on cumulative losses of over $60bn, according to S3 Partners, a financial analytics company. Just this year the losses have come to $11bn.

The “short interest” in Tesla — the percentage of shares that have been lent out to and sold by hedge funds — has now fallen from 20 per cent at the start of 2020 to just 3.3 per cent by mid-November, according to S3. A sign, industry insiders say, that fund managers are now reluctant to risk their careers betting against a stock that has defied financial gravity for so long.

Prominent bears keep falling by the wayside. Michael Burry, the hedge fund manager made famous by author Michael Lewis in The Big Short and portrayed by Christian Bale in the film of the same name, last year called Tesla’s stock price “ridiculous” and revealed that he was shorting it. But in October he said he had ended the trade and closed out the short position.

“It’s the original meme stock,” says Green, referring to companies like GameStop that have gained sky-high valuations off the back of social media hype. “Shorting Tesla is just an ego trade at this stage. Tesla has been a primary contributor to destroying the credibility of active management over the past few years.”

Tesla’s factory in Fremont, California, is one of the world’s most advanced automotive plants © Sam Hall/Bloomberg

EV bubble

Underscoring its financial idiosyncrasy, Tesla stock tends to not be much affected by other market and economic trends, but correlates somewhat with bitcoin, according to analysis by Quant Insight.

At the moment Tesla’s shares seem to be benefiting from a “mixed bag” of factors, such as rising inflation expectations, tighter dollar conditions and uncertain credit markets, but “Tesla spends a lot of time out of [recognisable] macro regimes — unsurprising when it is often driven by idiosyncratic factors like Elon’s tweets,” says Huw Roberts, head of analytics at Quant Insight. A macro regime is industry jargon for how different economic environments can hurt or help certain stocks or sectors.

The success of Tesla’s stock has also helped inflate what some analysts and fund managers think is a broader bubble in anything related to electric vehicles. Tesla-emulators Rivian and Lucid are now valued at about $110bn and $90bn, respectively, despite having negligible revenues and no profits.

An index of EV and electric battery companies compiled by the FT has a combined market capitalisation of almost $1.8tn. In contrast, automotive giants Toyota, Volkswagen and Hyundai, the biggest car manufacturers in the world, are worth about $254bn, $135bn and $42bn, respectively.

“There’s obviously a big halo effect with anything electric vehicle-related at the moment, thanks to Tesla,” says Benjamin Bowler, an equity derivatives strategist at Bank of America.

Line chart of $ showing Tesla's 2021 wild ride

Even Nikola, an electric truck start-up that has set aside $125m to settle fraud charges from the Securities and Exchange Commission over claims that it misled investors about its technology, is still valued at $5.4bn. That is enough to qualify it for the blue-chip S&P 500 index — if it had ever made any profit.

If Tesla’s ascent continues it will further enrich believers, hurt the dwindling band of doubters and drag swaths of the broader equity market up with it. But if it were to fall sharply, it could cause ripples through financial markets that are far in excess of what many appreciate.

Tesla did drop as much as 17.6 per cent in November before rallying once more, without the fall triggering any major ripples. But even this decline only took it back to its October level, and a bigger, more sustained drop could prove more impactful.

“There is a huge, recursive ‘tail wagging the dog’ nature to the valuation of a lot of things these days,” says Dickson. “I’m unwavering in my belief that ultimately the fundamentals are what matters. But over the past few years I can see that the short and intermediate term is far more dominated by flow, momentum, memes and appetites.”

He recalls the financial analyst Ben Graham’s adage that the stock market is a voting machine in the short run, but a weighing machine in the longer run. “In the current environment, I think we’re spending a lot more time voting,” says Dickson.

Additional reporting by Jamie Powell, Philip Stafford and Harriet Agnew in London

Video: Elon Musk: CO2 saint or sinner? | FT Film

November 21, 2021

Brussels plans central databases to boost capital markets

Brussels is planning to create US-style central databases that hold information on publicly listed companies and trading activity as part of a push to boost integration of its capital markets.

According to draft documents seen by the Financial Times, the measures will include changes to make it easier for investors to access information on companies operating in the EU and for EU banks and fund managers to find prices of stocks and bonds throughout the single market.

The proposals, set to be formally announced next week, are intended to make the EU more attractive to international investors following the UK’s departure from the single market.

“The EU’s global competitiveness is weakened by the fragmentation of its capital markets,” the draft documents say. Reforms to build a capital markets union “will in turn help companies tap into larger pools of capital held by institutional and retail investors across the EU”, they add.

The EU corporate reporting system, known as the European single access point, would consist of common, free public information about companies and products. At present, most information is scattered across multiple jurisdictions.

The project, aiming to go live in 2024, is likely to be paid for from the EU budget and overseen by Esma, the securities regulator, the documents say.

Authorities want to reproduce some of the benefits of services widely used in the US, the world’s biggest capital market, in many of its reforms. They include the Securities and Exchange Commission’s Edgar system for reporting corporate information and marketwide tapes that record trading information on stock and bond markets.

The European Commission envisages tapes that bundle together information collected from Europe’s patchwork of more than 470 exchanges and trading venues. Europe has long sought a “consolidated tape” but private efforts to build one have failed due to competing commercial interests, as well as slow and patchy data feeds.

“The total cost [to investors] of not having an accurate view of the equities markets can be as high as €10.6bn annually,” the document says.

Regulators have acknowledged that the last attempt to create a consolidated tape, in the 2018 Mifid legislation, failed. Brussels is planning to mandate that data providers supply standardised information to the tapes. Contributors would get “fair remuneration” and a minimum revenue in return, it said.

“Policymaking has typically focused on the needs of the intermediaries and we welcome the increased focus that policymakers now also have on end investors,” said Stephen Fisher, managing director of the global public policy group at BlackRock, at a conference in London on Thursday.

The proposed changes to market infrastructure addressed what he saw as Europe’s main weakness — trading that was fragmented along national lines and that “has held back capital raising and investor participation in capital markets”.

The proposals also include a formal ban on payment for order flow, a controversial practice in which retail brokers hand their orders to market makers in return for a fee. This is widely used in the US and Germany, but effectively banned in most EU countries.

Markus Ferber, a German MEP, welcomed the commission’s decision to address the issue but questioned whether an “outright ban” was the right approach.

The commission also wants to change the caps on the amount of business that can be executed in dark pools — off-exchange venues that fund managers to buy and sell large blocks of shares without disturbing the price on the market.

In addition, there are plans to tighten the rules on “systematic internalisers” — more lightly regulated invitation-only markets run largely by banks and high-frequency traders.

Other proposals include scrapping rules that require clearing houses to clear derivatives on rival exchanges, to build clearing capacity in the bloc after Brexit. Most of the euro clearing business is based in London.

Next year the commission will propose changes to the corporate insolvency framework and make it easier for companies to raise funds on exchanges, according to the draft documents.

Additional reporting by Chris Flood

November 20, 2021

Markets are showing signs of frothing over

They may possibly not ring a bell at the current market top rated, as the aphorism goes, but perhaps sports advertising is value seeing as an early warning sign. In 2000, the Super Bowl, pinnacle of the American football yr, was nicknamed the dotcom bowl when internet providers acquired 20 per cent of all the tv spots that aired during the match. Lehman Brothers, in 2006, made the decision it was a good use of resources to sponsor the once-a-year varsity rugby match between Oxford and Cambridge universities, presumably with an eye to recruiting would-be expenditure bankers. That exact year insurance coverage company AIG signed what was at the time a document-breaking sponsorship deal with Manchester United.

It is in this context that traders should really view the news that Crypto.com, a Singapore-dependent trading system, has paid $700m for the renaming rights to the Staples Middle in Los Angeles. It joins AC Milan sponsor BitMex and Lazio sponsor Binance as nicely as Main League Baseball’s formal crypto exchange FTX as crypto ventures building forays into the world of activity sponsorship.

Symptoms of froth abound in other risk property, not just cryptocurrencies. All a few important US stock indices — the S&P 500, the Russell 1000 and the Nasdaq Composite — arrived at document highs this thirty day period, as did the pan-European Stoxx 600, the German Dax and the French Cac 40. A great deal of this inventory trading, too, is developing by means of selections, enabling retail traders attracted by “meme stocks” and who dread missing out to guess applying borrowed revenue. Rivian, an electric motor vehicle maker with no revenues and huge losses that debuted on the marketplaces this 7 days with a capitalisation of $100bn, has similarly spurred discussion about the irrationality or or else of existing valuations.

Equities achieving these wonderful heights sits oddly with the increasingly hawkish noises coming out of central banks. The incredible rally considering the fact that the 2008 fiscal crisis — only briefly interrupted by the coronavirus pandemic — has been fuelled at least in aspect by expectations that fascination charges would be retained low for a very long time. Mounting inflation has now led central bankers to get started speaking about raising curiosity fees and accelerating their plans to taper asset buy. These moves will possibly still depart lengthy-term curiosity charges very low by historic requirements, but it is exceptional that inventory markets have seemingly failed to respond at all to the changing outlook.

The European Central Financial institution warned this 7 days there ended up symptoms of “exuberance” in housing and junk bonds as effectively cryptocurrencies. The phrase echoes a remark by previous Federal Reserve chair Alan Greenspan, who referred to the 1990s dotcom bubble as demonstrating proof of “irrational exuberance”. A smaller adjust in sentiment following a re-analysis of central bank’s ways could guide to a swift correction, the ECB argued.

Predictions of a coming marketplace plunge, on the other hand, have been common and regular considering the fact that the financial disaster. In 2016, for occasion, the Royal Financial institution of Scotland warned investors to “sell everything”. The very long bull industry has frequently, and wrongly, implied that it is impervious to this sort of doom-mongering — one cause why it has now tempted so lots of retail buyers to pile in.

The distribute of sponsorship deals is just one piece of evidence that it is commencing to get very long in the tooth. Nevertheless relying on the sign is likely to have to have some degree of patience: Britain’s Northern Rock commenced sponsoring Newcastle United fully 4 a long time ahead of it seasoned the country’s initially lender run for a century and a fifty percent. Bears may well require to be written content to check out from the sidelines for a minor whilst for a longer period.

November 19, 2021

Dow slides but tech stocks outperform as Europe’s COVID struggles rattle markets

Stocks traded mixed on Friday, as growing concerns over nationwide COVID-19 lockdowns in Europe raised fears about new restrictions beyond the continent.

The Dow slid 200 points, or 0.6{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}, while the S&P 500 rose 0.1{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}, but the Nasdaq composite added 0.2{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}, bolstered by rallying technology shares.

Markets were unsettled after the Austrian government announced a full lockdown starting on Monday, in response to cases of COVID-19 surging in Europe. The lockdown will include both those vaccinated and unvaccinated, it will last for 10 days minimum, but could be extended for 10 days further.

“The news is hitting European markets hard this morning as fears mount that the virus and restrictions will spread across the continent again,” said Jim Reid, chief economist at Deutsche Bank, adding that “the curveball might be the U.S.” given lower rates of vaccination domestically than in Europe.

“So although all the headlines are in Europe at the moment, will the U.S. be more vulnerable than many European countries over the course of the full winter? Recent history suggests the U.S. have a higher bar for economic restrictions related to covid but it also has a lower vaccination rate than their European peers,” he added.

The Nasdaq was boosted by a jump in stocks associated with the “stay-at-home” trade that characterized much of 2020. Treasury yields, which have jumped in response to rising inflation fears, retreated early Friday as investors flocked to safe-haven assets. Brent crude (CL=F) sank by over 3{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}, reflecting jitters that lockdowns will curb energy demand.

Meanwhile, shares of air carriers Delta Air Lines, United Airlines and American Airlines, and cruiseliners Carnival Corp and Norwegian Cruise Line fell between 1.4{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} and 2.3{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}.

And with the holiday season approaching and cold weather driving more people to meet indoors, public health officials are hoping to mitigate another COVID wave of cases this winter. The FDA on Friday authorized boosters of Pfizer/BioNTech and Moderna COVID-19 vaccines for all adults.

The U.S House of Representatives on early Friday passed President Joe Biden’s $1.75 trillion bill, however the legislation will be sent to the Senate where negotiations will continue. The bill lays out the Administration’s plans on education, healthcare and the climate.

Also in focus for the markets is Biden’s Federal Reserve chair nomination. Biden told reporters on Tuesday to expect the announcement of a nominee for Fed chair in “the next four days.” The White House has not indicated which way it is leaning, but market participants see two leading options: the reappointment of current chair Jerome Powell, or the elevation of Fed Governor Lael Brainard.

“The market so far is believing that it will be Powell again, but any sort of a change would mean that they want to hear a reiteration of the monetary policy and forward expectations,” Sonali Pier, Pimco’s Managing Director and Portfolio Manager, told Yahoo Finance Live on Thursday.

“[That means] tapering, being at a pace of about $10 billion in treasuries, $5 billion in agency MBS, then thereafter seeing rate hikes but not a significant shift to be more hawkish,” Pier added.

With earnings season ongoing, Foot locker (FL) shares lost ground Friday, even after the athletic shoe and apparel retailer said it expects global supply-chain issues to persist through this quarter. Intuit (INTU) shares soared by over 12{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} after the financial-software company’s top and bottom lines both beat analysts’ expectations, and hiked its full-year revenue guidance for 2021 to $1 billion.

12:53 p.m. ET: The Dow Slides, Tech Outperforms

Here’s where markets were trading midday on Friday:

S&P 500 (^GSPC): +8.730 (+0.18{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 4,714.09
Dow (^DJI): -318.12 (-0.39{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 35,732.83
Nasdaq (^IXIC): +109.71 (+0.67{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 16,101.90
Crude (CL=F): -$3.01 (-3.81{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to $76.00 a barrel
Gold (GC=F): -$12.50 (-0.67{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to $1,848.90 per ounce
10-year Treasury (^TNX): -0.4bps to yield 1.543{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}

9:30 a.m. ET: Stocks mixed, tech leads Nasdaq higher

Here’s where markets were trading shortly after market open on Friday:

S&P 500 (^GSPC): -6.33 (-0.13{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 4,698.21
Dow (^DJI): -214.78 (-0.60{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 35,656.17
Nasdaq (^IXIC): +39.95 (+0.28{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 16038.10
Crude (CL=F): -$1.51 (-1.91{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to $77.50 a barrel
Gold (GC=F): -$4.20 (-0.23{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to $1,857.20 per ounce
10-year Treasury (^TNX): unchanged to yield 1.6040{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}

7:30 a.m. ET Friday: Stock futures poised for mixed start

Here’s where markets were trading Friday morning:

S&P 500 futures (ES=F): -11.75 points (+0.25{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}), to 4,689.75
Dow futures (YM=F): -194 points (-0.54{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}), to 35,619.00
Nasdaq futures (NQ=F): +54.75 points (+0.33{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 16,536.00
Crude (CL=F): -$2.65 (-3.35{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to $76.36 a barrel
Gold (GC=F): +$1.90 (+0.10{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to $1,863.30 per ounce
10-year Treasury (^TNX): -0.5 bps to yield 1.529{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}

—

6:28 p.m. ET Thursday: Stock futures open higher

Here’s where markets were trading Thursday evening:

S&P 500 futures (ES=F): +0.5 points (+0.11{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}), to 4,706.50
Dow futures (YM=F): and +33 points (+0.09{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}), to 35,844.00

Nasdaq futures (NQ=F): +22 points (+0.13{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}) to 16,503.50

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in New York City, New York, U.S., July 19, 2021. REUTERS/Andrew Kelly

November 17, 2021

European Central Bank warns of bubbles in property and financial markets

The European Central Lender warned of stretched valuations in lots of asset markets, as the location carries on to recuperate from the coronavirus pandemic on the again of extremely-minimal curiosity costs and significant stimulus actions.

In its biannual balance report on Wednesday, the euro zone’s central lender pointed out vulnerabilities in property and money marketplaces, introducing that “hazard-getting by non-banking institutions and elevated sovereign and company personal debt are developing up.”

On residence, it said threats of selling price corrections over the medium term have improved significantly amid growing estimates of household price overvaluations.

“In individual, households with variable fee mortgages or shorter set-amount periods on their mortgages are uncovered to an unanticipated rise in desire costs, which could adversely impact their potential to service their personal debt,” the report stated.

Luis de Guindos, the vice president of the ECB, also highlighted a “placing buoyancy” for fairness and dangerous asset markets, “building them more inclined to corrections.”

“There have been examples of set up current market players exploring far more novel and more exotic investments. In parallel, euro place housing markets have expanded quickly, with minimal indicator that lending specifications are tightening in response,” he stated in the report.

Christine Lagarde (R), President of the European Central Lender (ECB), and Vicepresident Luis de Guindos (L)

Thomas Lohnes | Getty Visuals Information | Getty Pictures

Talking to CNBC on Wednesday, de Guindos reported in close proximity to-expression threats ended up evidently declining, but there ended up growing vulnerabilities for the medium time period.

He also insisted that inflation for the area should really still be found as “mainly transitory.”

“They [price rises] are likely to start out to fade out about the following months” he told CNBC’s Annette Weisbach.

“I imagine that most likely we will arrive at a peak in terms of inflation in November and later on, out projection is that inflation will begin to slow down.”

ECB purchasing slows

The central lender introduced in September it would be purchasing less bonds off the back again of surging customer rates. This started the procedure of little by little winding down its large pandemic-era stimulus offer.

Inflation in the euro zone strike 3.4{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} in September, symbolizing a 13-12 months superior. Inflation then hit another 13-calendar year substantial in Oct, at 4.1{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}, as the currency bloc battled surging power fees.

In September, ECB President Christine Lagarde made it obvious that the central bank’s actions were being a recalibration, but not a tapering. This is simply because the ECB is of the watch that greater inflation is non permanent and will fade in the course of 2022.

Some industry individuals consider the ECB is underestimating inflationary pressures and will for that reason most likely have to announce a level hike in advance of the start of 2023. Indeed, money markets have priced in the likelihood of a 20-foundation level hike for December 2022.

November 14, 2021

Financial Markets and Social Media: Lessons From Information Security

On January 28, 2021, stocks in U.S.-based video game retailer GameStop Corp. reached an all-time high of $483. Two weeks earlier, they had been trading at $20. Two weeks later, they were down again, and a congressional hearing on the matter was underway in Washington.

Wild swings are hardly uncommon in financial markets. This episode, however, had novel characteristics. In a recent report, the U. S. Securities and Exchange Commission states that “GameStop Corp and multiple other stocks experienced a dramatic increase in their share price in January 2021 as bullish sentiments of individual investors filled social media.” ¹ Retail traders congregating on the Reddit platform were key in both price formation and the emergence of a “Main Street versus Wall Street” narrative around the stock.²

The influence of social media on financial markets is here to stay, as younger generations start saving and investing. This carries both opportunities and risks. Information sharing and discussion on internet platforms can improve market transparency and efficiency. On the other hand, social media platforms are known vehicles of disinformation and manipulation of human behavior. They could be weaponized by malicious actors, ranging from state-sponsored groups to crime syndicates, looking to compromise market integrity and financial stability.

For liberal democracies with independent financial watchdogs, a complex policy challenge follows. In order to fight information operations, financial authorities will need to cooperate with intelligence communities and other relevant parts of executive branches. This requires rules that clearly define each party’s role and encourage reciprocal trust.

In many jurisdictions, cybersecurity statutes provide a starting point. They are, however, limited in scope, only covering cooperation vis-& agrave;-vis traditional cyber attacks. In this paper, we argue that the model must evolve to help prevent or defend against malicious information operations.³ We highlight, as a first step, the importance of organizational modules that allow entities with different levels of access to classified information to work together to assess and inform responses to hostile operations.

Retail Trading and Social Media

Nonprofessional trading has been growing for a few years, partly thanks to new low-cost, user-friendly fintech apps. According to market research firm Apptopia, the top seven trading apps that are not connected to legacy investment firms enjoyed 126-percent growth in U.S.-based downloads between 2015 and 2019. In 2020 and 2021, mobility restrictions related to the coronavirus pandemic translated into further interest in financial apps, both in terms of new users and of daily time spent on the apps by each user.⁴One of the most popular platforms, Robinhood, announced in its June 2021 IPO filing that it had 18 million funded accounts.⁵

Overall, in dollar terms, the phenomenon is still in its infancy. Participants may be legion, yet they invest relatively modest amounts.⁶Nevertheless, retail traders can have a substantial impact when they, as a group, target smaller stocks. Social media offer an opportunity for these groups to form and act at low cost and high speed.

Claudia Biancotti

Claudia Biancotti is a director at the Bank of Italy.

The wallstreetbets community on Reddit has emerged as a key forum for individual traders to exchange investment suggestions and coordinate actions. A few influential users taking an optimistic view of GameStop’s prospects were instrumental in building interest in the stock and orchestrating the first rally in early 2021. Before the GameStop episode, wallstreetbets had roughly 2 million subscribers. By July 2021, it had surpassed 10 million.⁷ Even as several members suffered heavy monetary losses, vivacious discussion and trading continued.⁸

Virtual trading communities have their own understanding of value. Participants certainly care about returns. Yet, as noted by economist Jayanth Varma, some of them maximize goals other than profit.⁹ Their trades are an investment and may also be a political, a moral, or even an emotional statement. Collective beliefs, epitomized in catchphrases and memes, are cemented by online interactions. The epic narrative of ordinary people challenging the powerful looms large. Making money is conflated with making a point, as photos of trades are posted with captions like “just joint the fight” (sic).¹⁰

This attitude partly originates in the crypto-asset world, the original twenty-first-century mixture of techno-utopianism, defiance, and run-of-the-mill profit seeking.¹¹ Indeed, wallstreetbets and crypto forums share a language, several players, and some trading apps. ¹² Although to different degrees, both are at the crossroads between internet phenomena and the formal financial system.¹³

Vulnerabilities

Increasing participation in financial markets and transparent discussion of assets in public forums can contribute to economic growth by improving efficiency in the allocation of capital. The popularization of nonmainstream financial analyses and trading strategies is also, per se, potentially positive. In market economies, asset prices reflect an average of different points of view. While this mechanism is expected to be reliable, sometimes it does not work perfectly, and divergent outlooks may be eventually proven correct. Asset valuation models improve over time, occasionally in the wake of such episodes.

When it comes to virtual communities there are, however, certain risks related to how ideas emerge and spread on the internet. Social media provide fertile ground for malicious information operations. Hostile actors can leverage features of online platforms to covertly nudge unaware users toward opinions and actions that serve destructive agendas.¹⁴ In the financial sector, most such agendas would involve erosion of trust—in markets, in individual institutions, or in regulators. While there is no evidence that the GameStop saga was driven by external adversaries looking to disrupt the market, some have argued that the next meme stock frenzy might well be.¹⁵

Social media are vulnerable to information operations for a number of reasons. First, they use recommendation systems based on what users read and watch, and suggest more of the same. For those with mainstream preferences, recommended content converges to big-name media outlets. For those interested in uncommon ideas, algorithms tend to generate “rabbit holes,” or exposure to progressively more extreme theories. Strategically placed ads can accelerate the fall down a rabbit hole. Adversaries who are adept at injecting their views into this system can succeed in creating self-reinforcing bubbles of radicalized users.

Second, despite significant effort by major platform operators, the presence of fake accounts on social media remains a difficult problem to solve. Troll factories, which are large groups of individuals paid to write comments online, can be deployed to create the illusion of sizable, active communities. Artificial intelligence can generate realistic profile photos that depict nonexistent individuals, and it is making strides toward the ability to post articulate, credible text. Inauthentic action has been repeatedly discovered in online discussions of sensitive topics such as race, gender, and the pandemic.¹⁶

Another significant factor, most evident in specialized discussion boards such as wallstreetbets, is the informal hierarchy among users. A few influencers play a major role in orienting group choices. Adversaries that succeed in recruiting influencers can hold sway over large crowds. This is also true in the offline world, but social media act as a formidable amplifier and accelerator.

The financial sector is a very attractive target for malicious actors of all stripes, a well-established fact in cybersecurity. Attacks against financial institutions or infrastructure are frequent. They offer the potential for monetary gain, exfiltration of sensitive information, and even systemic disruption of the economy.¹⁷ Adversaries may see information operations aimed at distorting price signals, undermining confidence in financial institutions, or otherwise creating disorder, as a means of inflicting the same kind of harm with fewer risks of detection and retaliation compared to traditional cyber campaigns.

Information operations that start off by targeting the financial system can eventually spill over to the political arena. Near-term, domain-specific outcomes—say, high market volatility or inspiration of protests against a single regulatory provision—may reinforce social divisions over broader ideological issues such as the ethical merits of capitalism, the trustworthiness of corporations, and the accountability of governments.

A Challenge for Policymakers

In liberal democracies, preservation of the financial system’s integrity and stability generally falls within the remit of independent authorities. This is meant to ensure that regulatory and supervisory decisions, while serving purposes defined by the law, are nonpolitical. Watchdogs have a broad range of conventional instruments to mitigate any risks of disruption ex ante, which they are adapting to new technologies.¹⁸ They also have the legal means to tackle standard market manipulation and fraud.

In the face of possible information and influence operations, however, financial authorities cannot and should not work alone. Whenever external actors attempt to interfere with a nation’s strategic assets and systems, the problem becomes political. An essential part of the data needed to understand an operation’s goal and mechanics is likely to be exclusively available to intelligence communities. Most importantly, decisions on response are a task for executive branches since they channel security policy choices.

The challenge for policymakers is to bring independent authorities and government agencies together to fight information operations in the financial system, leveraging the existing capabilities of each party and introducing new ones where necessary. Cooperation frameworks are needed that clearly define roles and responsibilities, and foster mutual trust.

In several jurisdictions, frameworks are already defined in cybersecurity laws, but they only cover threats to IT systems—unauthorized access, data exfiltration, ransomware, and so on. The model must be expanded and adapted to malicious information operations. The nexus between social media and retail trading offers the starkest example of a vulnerability right now, but it is important to note that the financial system as a whole is a potential target.

Financial watchdogs constantly keep an ear on the ground for anomalies within their supervisory perimeter. For example, market authorities all over the world engage on a continuous basis in market surveillance, a wide array of activities ranging from verification of potentially harmful rumors to real-time deployment of data analytics to detect illicit behavior. Staff in financial watchdogs also already know how to watch for and react to websites and social media accounts deliberately misleading the public on a company or an asset.

These are good starting points, yet some re-skilling has to occur. In particular, influence operations do not necessarily build on lies alone& mdash;indeed, they are more credible when they incorporate elements of truth. Financial authorities have to learn the basics of how malicious information manipulation works, so that they can be on the lookout for the right clues. There is a need for threat awareness and at least some diffuse capability for intelligence analysis within all regulatory and supervisory agencies.¹⁹

Paolo Ciocca

Paolo Ciocca is nonresident scholar in the Cyber Policy Initiative.

Any suspicion of an information operation should be reported via structured channels to the intelligence community for further analysis and, where applicable, attribution. In traditional cybersecurity, the toughest part is finding the culprit(s) of an attack, who are often obfuscated by layers of hijacked machines and unaware accomplices. This applies a fortiori to information operations. Once conclusions are reached, they must be passed on to the relevant level of government for response decisions.

One important choice to be made is: to which extent should independent authorities stay involved in the process of investigating the operation, after they have alerted the government and provided a first round of data and evaluations? A delicate balance must be struck between protecting confidentiality, leveraging specialist skills, and avoiding frictions across institutions, while staying true to the legal mandate of each party.

Preferred solutions would likely vary across countries, even within like-minded groups such as the G7. It is nonetheless possible to find some common patterns across different systems and draw lines of reflection, at least in terms of principles. From a procedural point of view, it is crucial that this issue is settled transparently from the beginning. Factors that need to be considered include, but are not limited, to the following:

government agencies, independent authorities, and other potential participants in the process—for example, private sector entities or academia—have different levels of access to classified and otherwise sensitive information;

information must be passed along to participants on a need-to-know basis;

the effectiveness and fluidity of information exchanges need to be maximized; and

process separation must exist between information gathering, analysis, and response.

These constraints require a flexible organizational module, which enables differentiated access to information across participants. In several countries, current practice in homeland security foresees so-called “fusion centers” or “fusion cells,” hubs where data and capabilities of heterogeneous actors are jointly leveraged for a given goal.²⁰ Fusion centers can involve participants outside of intelligence and law enforcement, such as health authorities or private companies.²¹ The model could be adapted to include stakeholders from the financial sector. It could also envision appropriate modes of participation for platform operators, since they have access to crucial data on users, and for qualified communities of independent investigators, such as from academia. Depending on the jurisdiction, fusion centers may build on preexisting, cyber-related information sharing arrangements.

Conclusions

Finance-focused virtual communities are growing in size and potential economic and social impact, as demonstrated by the role played by online groups of retail traders in the GameStop case. Such communities are highly exposed to manipulation, and may represent a prime target for state and nonstate actors conducting malicious information operations.

Sophisticated information operations carried out online may be very hard to distinguish from spontaneous behavior. Financial authorities should learn the basic elements of how malicious information operations work, and act as a first line of detection and defense. An appropriate legal framework should be in place so that sector watchdogs can contribute data and specialist knowledge to governmental actors tasked with analysis of and response to information operations. This can be achieved by implementing organizational modules that allow entities with different levels of access to classified information to work together and, in several jurisdictions, by adapting existing legislation on cybersecurity.

The opinions expressed in this paper are personal and should not be attributed to the Bank of Italy, Consob, or the Carnegie Endowment for International Peace. The authors would like to thank Giuseppe Ferrero, Arthur Nelson, Mario Rasetti, Michele Savini Zangrandi, Giovanni Veronese, and three anonymous reviewers for useful insights and suggestions.

Notes

¹ “SEC Staff Releases Report on Equity and Options Market Structure Conditions in Early 2021,” U.S. Securities and Exchange Commission, October 18, 2021, https://www.sec.gov/news/press-release/2021-212.

² Other listed companies, such as AMC Holdings and BlackBerry, were involved in similar dynamics.

³ For a discussion of terminology relating to how information is used to influence target audiences, see Alicia Wanless and James Pamment, “How Do You Define a Problem Like Influence?,” Journal of Information Warfare 18, no. 3 (2019): 1–14, https://carnegieendowment.org/files/2020-How_do_you_define_a_problem_like_influence.pdf.

⁴ Adam Blacker, “Robinhood Now Has More Mobile Monthly Active Users Than the Top Legacy Providers Combined,” Apptopia, January 6, 2020, https://blog.apptopia.com/robinhood-now-has-more-mobile-monthly-active-users-than-the-top-legacy-providers-combined.

⁵ “United States Securities and Exchange Commission, Form S-1 Registration Statement, Robinhood Markets, Inc.,” U.S Securities and Exchange Commission, July 1, 2021, https://www.sec.gov/Archives/edgar/data/1783879/000162828021013318/robinhoods-1.htm.

⁶ IHS Markit, a financial data firm, estimates that “individual-driven, pure play retail accounts” commanded roughly 3 percent of total trading volume on U.S. stock markets between January 2020 and January 2021. Volume is computed based on “changes to custodial positions at Charles Schwab, E*Trade, Interactive Brokers, National Financial (Fidelity’s retail arm), Robinhood, TD Ameritrade, and Wells Clearing custodians.” It does not reflect intraday trading, or individual investment mediated by professional wealth managers. IHS Markit does not specify the reference market(s). According to Reuters, investment bank Morgan Stanley puts the figure at a much higher 10{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}– 15{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} for the Russell 3000 index. The computation methodology is not publicly available. See “Retail Investor Trends: Revisiting the Impact of Retail Activity,” IHS Markit, March 1, 2021, https://ihsmarkit.com/research-analysis/ retail-investor-trends-revisiting-the-impact-of-retail-activity.html; Thyagaraju Adinarayan, “Retail Traders Account for 10{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} of U.S. Stock Trading Volume – Morgan Stanley,” Reuters, June 30, 2021, https://www.reuters.com/business/ retail-traders-account-10-us-stock-trading-volume-morgan-stanley-2021-06-30/.

⁷ Not all subscribers are active in discussions, but installing the Reddit app on a smartphone and joining a subforum, or subreddit, implies exposure to content notifications on a somewhat regular basis.

⁸ For example, Robinhood was still in Google Play’s top 100 chart in the spring of 2021.

⁹ Jayanth Varma, “The Rationality of r/wallstreetbets,” Prof. Jayanth R. Varma’s Financial Market’s Blog, January 31, 2021, https://jrvarma.wordpress.com/2021/01/31/ the-rationality-of-r-wallstreetbets/.

¹⁰ Novabud, “Just Joint the Fight #GME STAY STRONG,” Reddit, March 5, 2021, https://www.reddit.com/r/wallstreetbets/comments/lyfh2x/ just_joint_the_fight_gme_stay_strong/.

¹¹ Nick Paumgarten, “The Prophets of Cryptocurrency Survey the Boom and Bust,” New Yorker, October 15, 2018, https://www.newyorker.com/magazine/ 2018/10/22/the-prophets-of-cryptocurrency-survey-the-boom-and-bust.

¹² GameStop and other so-called meme stocks are traded in regulated markets. Bitcoin is not but, in the quasi-normalized version of today, it is traded by some professional investment firms following strategies that have long been employed for other high-volatility instruments, without any connection to the cryptocurrency’s original spirit. The appearance of normalization is reinforced by a few high-visibility brands choosing to accept Bitcoin as a means of payment—it is, however, important to note that Bitcoin is not legal tender, with the sole exception of El Salvador. See Robin Wigglesworth and Eva Szalay, “’Digital Tulip’ or New Asset Class? Bitcoin’s Bid to Go Mainstream,” Financial Times, February 12, 2021, https:// www.ft.com/content/7ac6c3a6-3fed-4dd9-8a69-939ad6094933.

¹³ Wallstreetbets also has a measure of contiguity with other controversial corners of the internet. The forum’s tagline is & ldquo;Like 4chan found a bloomberg terminal” (sic), a reference to a now-defunct platform famous for hosting inflammatory content and favoring divisive, politically charged verbal extremes. Similar affinities exist in parts of the crypto world, especially where technical decentralization is translated into an anti-system sentiment.

¹⁴ This subject is discussed in a large and growing literature. Summarizing it is beyond the scope of this work. For an introduction to research methods in this field, see Technology and Social Change Research Project Team, “The Media Manipulation Casebook,” Harvard University, https://mediamanipulation.org/about-us. For a nontechnical primer, see for example P. W. Singer and Emerson T. Brooking, Likewar: The Weaponization of Social Media (Boston: Houghton Mifflin Harcourt, 2018).

¹⁵ Some retail traders appear aware of the problem, as shown by Russian spy-themed memes during the March 2021 wallstreetbets craze around U.S. defense contractor Palantir. Also see Josh Lipsky and William F. Wechsler, “The Gamestop Saga Is A Road Map For The Kremlin And Other Enemies Of America — Here’s Why,” MarketWatch, February 1, 2021, https://www. atlanticcouncil.org/insight-impact/ lipsky-and-wechsler-in-marketwatch-the-gamestop-saga-is-a-road-map-for-the-kremlin-and-other-enemies-of-america-heres-why/.

¹⁶ On the pandemic and vaccines, see for example European Union External Action Service, “EEAS Special Report Update: Short Assessment of Narratives and Disinformation Around the Covid-19 Pandemic, April 2021, https:/ /euneighbourseast.eu/news-and-stories/publications/ eeas-special-report-update-short-assessment-of-narratives-and-disinformation-around-the-covid-19-pandemic-update-december-2020-april-2021/.

¹⁷ Also see Tim Maurer and Arthur Nelson, “International Strategy to Better Protect the Financial System Against Cyber Threats, ” Carnegie Endowment for International Peace, November 18, 2020, https://carnegieendowment.org/2020/11/18/ international-strategy-to-better-protect-financial-system-against-cyber-threats-pub-83105.

¹⁸ On those, one issue that warrants special attention today is transparency with regard to business models, potential conflicts of interests, and the treatment of customer data. There may also be scope for innovation in disclosure requirements for asset issuers. Perhaps potential investors are entitled to know if a company can count on the support of r/wallstreetbets or Twitter, the way they must be informed of changes in funding or ownership. A reflection is needed on the shifts in risk appetite induced by a sizable influx of small investors.

¹⁹ This is urgent in areas where information plays a key role, such as finance, but also applies to other strategic economic branches. Social media are everywhere, influence operations can be anywhere.

²⁰ For example, the U.S. Department of Justice defines a fusion center as a “collaborative effort of two or more agencies that provide resources, expertise, and information to the center with the goal of maximizing their ability to detect, prevent, investigate, and respond to criminal and terrorist activity.” “Fusion Center Guidelines: Developing and Sharing Information and Intelligence in a New Era,& rdquo; U.S. Department of Justice, August 2006, https://bja.ojp.gov/sites/g/files/xyckuh186/files/media/document/ fusion_center_guidelines_law_enforcement.pdf.

²¹ “Nontraditional collectors of intelligence, such as public safety entities and private sector organizations, possess important information (e.g., risk assessments and suspicious activity reports) that can be “fused” with law enforcement data to provide meaningful information and intelligence about threats and criminal activity.” From “Fusion Center Guidelines,” U.S. Department of Justice.