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The NASDAQ Whale: How did SoftBank Fuel the Recent US Stock Market Rally?

Sep 7, 2020 6:22 AM 3 min read
Editorial

Recall the “vertigo-inducing” NASDAQ rally rocking US equity markets in late July, driven by the rise of big tech stocks? A period when Apple became the first publicly-traded US company to reach a $2trn market cap; Amazon adding more to its share price in a month than it did in all of last year; and Tesla founder Elon Musk overtaking Warren Buffett as one of the world’s wealthiest people? (Here’s the link in case you want to refresh your memories.)

While many were cautious of the unprecedented rise, warning of another bubble inflating, others credited the spike of work-from-home culture, increasing  reliance on tech, and rise of the so-called Robinhood investors.

Well, it seems like there was a much flakier and non-Robinhood driver behind the rally - the “Nasdaq Whale” - as termed by a recent Financial Times story.

 

Who is the NASDAQ Whale?

Turns out that SoftBank, the Japanese Conglomerate and investment powerhouse behind giants like We Company, Slack and Boston Dynamics was pumping the market.  

SoftBank bought options tied to around $50bn worth of individual tech stocks, fuelling the largest ever trading volumes in contracts.

Quick Fact: Options are contracts that give the bearer the option (but not the obligation), to either buy or sell an amount of the underlying asset (e.g. A stock or a commodity) at a predetermined price within a predetermined time-frame.  

A call option gives the holder the option to buy the asset and a put option gives the holder the option to sell the asset.

According to regulatory filings, SoftBank bought straight up stocks worth c. $4bn in tech giants such as Amazon, Microsoft, Netflix and Tesla. In addition, it purchased roughly an equal amount worth of call options tied to the underlying stocks it already had, as well as on other names. This gave SoftBank a “derived” position of roughly $50bn, large enough to lift the broader market. On the side, SoftBank also sold call options at (now) higher prices.    

Important to note here is the fact that five tech stocks - Microsoft, Apple, Amazon, Alphabet and Facebook - disproportionately account for c. 39% of NASDAQ’s total heft. Needless to say, any movement in these five stocks will result in a shift in the entire index, as such.  

The overall nominal value of calls traded on individual US stocks has averaged $335bn a day over the past two weeks, according to Goldman Sachs - more than triple the rolling average between 2017 and 2019. 

It was this noise in the options market that added the recent froth to the stock market itself, as per analysts. And we can see some of it reversing already. NASDAQ fell sharply on Thursday, declining 5%, and was down another 2.5% on Friday.

 

The NASDAQ Whale: How did SoftBank Fuel the Recent US Stock Market Rally?

 

But What’s the Rationale Behind SoftBank’s Such Massive Investments?

Well, to begin with, by paying only a small premium to buy options, SoftBank was able to load up on a much larger notional amount of shares. The roughly $4bn in options generated an exposure of around $50bn.  

These enabled SoftBank to not only gain from the rise in stock prices in the near term, but also allow it to lock in gains by unloading its position to other parties.

However, considering the potential the conglomerate holds to sway the stock market (a glimpse of which we have already had), and given its history of plummeting profits, not so successful bets in We Company and Uber, and its refusal to disclose operating profit in its quarterly results, SoftBank’s foray into the stock market is an unsettling thought. 

Investors must keep their guards up. But meanwhile let’s hear our beloved Zero Hedge rant on this trade (a day before FT caught up):

“It is hardly unreasonable to imagine SoftBank, the "brains" behind such catastrophic investments as WeWork, WireCard, and countless other failed "unicorns" would desperately try to Volkswagen not just a handful of tech names, but the entire market in the process. After all, Masa Son is desperate to deflect attention from the fact that as we put it last October, "SoftBank is the Bubble Era's "Short Of The Century." And if there is one thing that can salvage the Japanese VC titan's reputation it is a second tech bubble which blows out the valuation of his countless (otherwise worthless) investments which form the backbone of SoftBank's "AI Revolution" whatever that means.”

FIN.

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