“Things don't have to change the world to be important.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
June 10, 2022
Fiat Lux
Featured Trade:
(STOCKBROKERS SIGNALING BIG CHANGES AHEAD)
(VIRT), (HOOD), (CITADEL)
Virtu Financial, Inc. (VIRT), Robinhood Markets, Inc. (HOOD), and Citadel Securities will need to change business models after the SEC plans unprecedented market changes so that high-frequency trading companies cannot front-run retail orders anymore.
Citadel is the only one of these 3 that is not public and for the other 2, heavy short interest will attract these stock names.
It’s about time.
The regulation revolves around retail investors finally getting a fair order for their market stock orders.
Market orders aren’t specified at a certain price and because of that, companies front-run these orders and skim a few pennies off their orders, before finally selling them to the end retail investor.
Crazily enough, this has been legal for many years, which is why the CEO of Citadel Ken Griffin can buy a new $100 million property every year.
Under current rules, brokers must perform “reasonable diligence” to determine the likely best market for executing a trade.
Robinhood Markets essentially sell historical retail trade data to Citadel and Virtu, better known as Payment for order flow (PFOF).
This is the juice that these HFT firms use to front-run the retail traders by deploying their professional algorithms.
Nobody in the trading community thought the SEC would get their heads around and do something about this egregious loophole in trading.
I need to give credit where credit is due, and diverting market trades into an auction where the actual best price is procured for the retail trader finally gives power back to the little man after getting fleeced for so many years.
CEO of Virtu Douglas Cifu and Ken Griffin must now expose their capital to risk if they wish to make money in markets.
What a thought!
The zero-risk era of front-running trading is coming to a close meaning companies like Robinhood are worth zero since their profits come from PFOF.
HOOD is worth zero because they don’t charge traders for trading fees because they package all revenue in the form of PFOF.
If that is now worth zero, then do the math: the company is also worth nothing.
This would also take down one of the biggest crypto-based companies whose claim to fame was being the rock-solid broker for the crypto traders.
Well, it’s hard to make money when your customer goes bankrupt, which is exactly what happened to crypto traders since November 2021.
Now, imagine charging for trades and competing with real brokers in the vanilla game of stock broking and the future looks quite daunting.
On the plus side, VIRT and Citadel can roll their mass profits into risk-based trading strategies. However, that could lose money, which they aren’t used to.
This is still only a proposal and not legislation yet, so the dust has yet to settle.
However, if this does come to pass, expect trading commissions to come back in full and no more free trading, because stockbrokers need some way to make money if they can’t sell your trading data.
The gamification of trading by HOOD has alerted the SEC to tighten down the hatches; and this has been coming for quite a time.
The SEC has proven in the past that when there is a red target on one’s back, they usually don’t just give a pass.
As a response to the SEC proposal, HFT brokers are pedal to the metal with lobbyists and government pressure to block this proposal.
If this proposal goes through in some potent form, expect HOOD and VIRT to be down big and for Ken Griffin to purchase less $100 million mansions.
“The only constant in the technology industry is change.” – Said Founder and CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
June 8, 2022
Fiat Lux
Featured Trade:
(THE ULTIMATUM)
(TSLA), (TWTR)
Founder and CEO of Tesla (TSLA) Elon Musk is clearly either angling for a cheaper purchase price for Twitter (TWTR) or is ready to walk away from the deal.
Even if he does walk away from the deal, he was able to sell Tesla shares at elevated prices, then rolling the capital into Twitter shares, and that in itself is worth more than $1 billion.
If you haven’t kept up with what’s happening, Tesla shares have fallen quite substantially, about 35% to be precise, since Musk unloaded those shares.
Around 35% of the $8.5 billion in Tesla shares by Musk would amount to around $3 billion and if he is forced to pay that $1 billion walkaway fee then he would still gain $2 billion net from his antics.
He is literally playing with house money at this point.
Aside from the actual deal, the global exposure of this deal to his own brand is worth over $15 billion in itself as everyone has been zoned in on this drama because of simple palace intrigue.
The $1 billion he would pay to walk away would also drum up another tsunami of media exposure for Tesla, Space X, Starlink, and Musk.
Musk treating this as his own Johnny Depp versus Amber Heard case is stimulating the media algorithms to push his name into every corner of the global media world so who cares about the $1 billion.
In short, Musk is already a winner, and if he can parlay this bot angle into a 30% discount on Twitter then that would be some epic showmanship while living on the edge.
He would be really making his cake and eating it too.
Musk has also become highly sensitive to how the social media world operates in which usually the loudest and most frequent poster usually is heard first and clearest.
He’s taken that strategy by posting on Twitter relentlessly and often about highly controversial content just so the media talk about him.
He’s not far away from every 24-hour news cycle at this point.
The Twitter sale agreement does allow Musk to get out of the deal if Twitter causes a “material adverse effect,” defined as a change that negatively affects Twitter’s business or financial conditions.
That's one reason Musk may be focusing on the spam bot problem — though he waived many of his rights to peek under Twitter's hood when he signed the deal.
Bots are basically programs that post automated tweets but have been systematically weaponized in the era of the internet.
Musk says it’s also a problem for advertisers who take out ads on the platform based on how many real people they expect to reach.
Musk wants to be compensated by the Twitter “bot” problem with either a lower Twitter price or the opportunity to walk away for free.
If the deal doesn’t go through, there is a high chance that Twitter shareholders sue the Twitter board for going against their fiduciary duty.
While I can easily see the Twitter board suing Musk while he countersues if he decides to walk away and doesn’t pay the $1 billion termination fee.
It would be a lawyer’s dream and a businessman can afford this if you’re the richest one in the world.
The market sensing Musk might not go through with the deal means that Tesla shares are free to rock higher and Twitter shares could sink.
Musk’s Twitter circus doesn’t affect Tesla’s real business itself.
Twitter has many internal problems along with terrible management and Musk has done everything he can to expose its hypocrisy.
If this deal completely turns sour, expect Twitter shares to tank big time, meaning like a halving.
Personally, I wouldn’t touch Twitter shares with a 10-foot pole.
“The car business is hell,” said founder Elon Musk, when announcing he would sleep in the Fremont Tesla factory until Model S production reached 2,500 units a week.
Mad Hedge Technology Letter
June 6, 2022
Fiat Lux
Featured Trade:
(A KEY CLUE TO THE FUTURE OF META)
(FB), (COMPQ)
Chief Operating Officer (COO) of Facebook (FB) Sheryl Sandberg quitting from her post caught many off guard.
It seemed like she was in it to the end, until she wasn’t.
Most thought she wouldn’t stop until the company she worked for completely destroyed democracy, or ruined other countries’ free elections, or until she had more money than most sovereign countries.
Apparently, that wasn’t the finish line!
Did she get tired of all the mass killings that Facebook streamed live to its multi-billion-person audience?
Probably not.
My read into this is that Facebook is heading directly for a cataclysmic revenue iceberg and Sandberg is definitely not on board with the new direction of the company, i.e. the Metaverse.
The Metaverse has already lost 10s of billions of dollars and will continue to do so for the next couple of years for a very untested and unproven technology.
She clearly gives the Metaverse a big thumbs down and we might look back on this to a vital signal or even a missed sign.
Sandberg would most likely stay on board if there was another billion it in for her.
Remember, it was Sandberg who brought the concept of a digital ad model from Google to Facebook which catapulted Facebook into a wildly successful cash cow for its shareholders.
After that, I am not sure what else she did, but most executives never get that far in the first place.
Another takeaway from her resignation is that her digital ad model which essentially stole personal data from the user to sell to digital advertisers is on a downward and irreversible trajectory.
The underlying data supports this notion as Facebook, minus Instagram, bleeds users.
So instead of being in Menlo Park to take the blame for the downfall, might as well rebrand herself as the most powerful female Venture Capitalist in technology and move on to reignite her corporate feminism.
Even though she did pocket well over a billion dollars from her 14-years in mostly vested stock selling, she will be more known for selling out the Facebook user.
Rather than sacrifice a smidgeon of profitability to protect users, she decided to build a colossal army to construct a communications and government affairs squad to deny and deflect criticism of Facebook.
Those teams have been supremely effective at stymieing any momentum to go after Facebook itself.
That’s why the company is never in trouble and executives aren’t in jail.
They run a playbook of delaying tactics that stretch each story beyond the attention span of journalists and policymakers and even paying others to write bad press.
Sandberg was the engineer of that strategy and of the teams that implemented it. This was a deliberate choice. So was the Facebook decision to hire a consultancy to do opposition research about George Soros after the billionaire criticized Facebook in a speech at the World Economic Forum in early 2018.
She is a master of the dark arts and her quitting at Facebook does help cleanse the stench of the tech industry that has built a rotten reputation recently.
The biggest corporate sellout of Silicon Valley quitting epitomizes the deep trenches tech and Facebook find themselves in right now.
The fall from grace in 2022 has forced many hedge funds to liquidate.
Negative wealth effects are something no industry wants to be a part of.
However, it appears there is light at the end of the tunnel.
The 30% correction in the Nasdaq index has been followed by a 6% bear market rally.
The good news is that it's highly likely the Nasdaq index will not experience another 30% correction in the second half of 2022.
However, a recession not yet being priced into Nasdaq shares and a bad earnings setup put a spanner into the works, which is why the bear market rally is legitimately capped to the upside.
This means that it's the year of the short-term trader while long-term ETF holders won’t and haven’t found much success this year.
Sell the big rallies and buy the big dips, then take profits.
At least now is the time we are starting to discover dip buyers after they took the first 6 months off in 2022.
“I know tech better than anyone.” – Said then-current President of the United States Donald J. Trump on his Twitter Account in 2018