The Secret Broker: A trader’s ‘Wish I knew then, what I know now’ moment
The Secret Broker
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
Well it’s been a big week and another of my New Year predictions looks like becoming true, thanks to some bank we have never before heard of and a Swiss bank whose balance sheet resembled their favourite cheese.
Full of holes.
My prediction was based on the fact that we all start out at the beginning of the year with fresh equity eyes but about 3 months in, the honeymoon is over and things are now being looked at through tired, rubbed red, equity eyes.
For example, at the start of the year, CBA were trading at $102.96 and reached a high of $111.11 on February 3.
On Tuesday of this week (March 14), they hit $93 (or $95.10 if you include their dividend).
All of this action and it’s only March 17.
So, a listed bank based in Silicon Valley collapses and the ripples are felt all over the world, all because of the fact they managed to mismatch their assets with their liabilities.
In 2006, they held deposits of US$4bn, which had risen to US$189bn by 2021. It turns out that 2021 was a turning point for them because by 2022, deposits had fallen to US$173.1bn as things in Silicon Valley started to slow down.
The easy money was starting to dry up and interest rates were starting to rise and, as with any newcomer bank to the scene, they didn’t have the depth of knowledge or skills to risk-manage all of these funds on deposit.
When you witness a run on a bank, it is horrendous and very quick. In their dying days, customers attempted to withdraw US$45bn in a single day.
Can you imagine the panic and the queues and the stress? If you can’t, I’m sure a Netflix drama series will fill you in within 18 months.
Then, to add to the drama, there was a rumour that Harry and Meghan had all their money held on deposit there.
If this is the case, then a follow up to Harry’s book Spare will quickly be penned and released with the title ‘Spare… me some change please’, together with a Royally crowned GoFundMe campaign.
Keep an eye out for any donations from a ‘Charlie’, ‘Willy’ or a ‘TSB’.
Actually, the situation was not as bad as everyone thinks. Unlike the collapse of Allied Irish Bank PLC, which managed to Swiss cheese a €20bn hole, this Silicon Valley Bank only had a bagel-sized hole of about US$2bn.
Ironically, if they had not suffered such a severe run on itself, the very sharp bond rally that has since occurred because of their demise would now have left them solvent.
Howzat for a kick in the Brazils?
But wait, it gets better.
Imagine that as a trader, you had worked out that this listed bank was on the nose months ago and bought some puts in them. (Buying a put is like shorting a share but all you can lose is the premium that you paid for the put.)
Imagine you bought US$900 worth of puts three months ago. As the shares are now worthless, your position is now worth US$15,000.
You’d think that high fives in your local bar and a quick trip for you and the Mrs to Las Vegas was on the cards. But no.
No no no no no no. The rules can prevent you from closing out your position, forever.
You would not know this until it has happened to you and now this is where the ‘I wish I knew then, what I know now’ moment comes into play.
The option exchange in America decided to change the rules on how brokers can treat these puts, when a company’s shares are worthless and therefore can no longer trade.
The new rules now read that it is up to the broker’s ‘discretion’ whether they settle any option trades, if a company has been suspended indefinitely.
In the example above, it’s the person who created the puts and collected US$900 for their effort who is now liable, on paper, to have to pay out US$15,000 upon settlement.
If the broker decides that one client is worth more to them than the other and declares that they will not settle the put, then the put contract value goes from US$15,000 to… ZERO!
Not only that, but the holder of the put loses their initial outlay of US$900 as well.
Can you imagine that?
You get it right and you lose US$900, not make US$15,000.
If this happened to me, everyone in the house would know to disappear for a few days, including the dog. He can sense the change in my energy, before anyone else can!
I would be pissed (in both senses of the meaning) at a ruling like this. More so at myself for not knowing it till now, and the fact I had been using the wrong broker.
So, now we know. If you do not close your option position out whilst the company is still trading, you lose your initial stake. Plus the seller is let off the hook for the US$15,000 that they owe you.
I’ve seen it when the Bunker Hunts (the brothers, not rhyming slang) tried to corner the silver market.
The brokers on the other side of their position lobbied the Metals Exchange so much that they decided to lift the margin rates so high that the brothers went broke, after being up billions.
There was also a time on the ASX, pre 1987, when a small firm broker was acting for a company in a takeover situation and they were instructed to stand in the market and buy as many shares as possible in the target company.
When the broking firm went through all their buy tickets, they realised they had purchased 110% of the company shares. The other brokers had shorted them 10% more shares than actually existed.
This was on the Friday night.
On the Monday morning, just before the market opened, there was a scramble by the brokers to cover their shorts at over $5.00 higher than what they had sold them for. The stock was put into a trading halt by the ASX listing committee.
The brokers caught on the wrong side had lobbied the ASX listing committee so much over the weekend, that it was ruled that all short trades carried out in this stock on the Friday would be cancelled out.
Guess which brokers got their trades cancelled? The ones sitting on the committee.
Guess which broker is refusing to settle puts in Silicon Bank? Robinhood. The reddit crowd’s favourite broker.
Now we know who’s really been doing the robbin’ this time around.
PS. If Netflix do create a show based on Silicon Bank, Meghan could play herself and thus earn some of Harry’s Spare money back. I have Ed Sheeran up to play the part of Harry.
Actually, Harry could play the part of a young James Hewitt – that’ll be double bubble for the Windsors!
Feel free to contact him with your best stock tips and ideas.