SoftBank unmasked as the “NASDAQ whale” that fueled the technology rally

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SoftBank is the “whale of the Nasdaq” that bought billions of dollars in US equity derivatives in a move that fueled the feverish rally in big tech stocks before a sharp pullback Thursday, according to people familiar with the matter.

The Japanese conglomerate has bought huge amounts of options on technology stocks over the past month, contributing to the highest volumes of individual company-related contract trading for at least 10 years, the people said. One banker described it as a “dangerous” bet.

The aggressive shift in the options market marks a new chapter for the investment powerhouse, which in recent years has made huge bets on private tech start-ups through its $ 100 billion Vision Fund. After the tumult in the coronavirus market hit these bets hard, the company created an asset management unit for public investments using capital contributed by its founder Masayoshi Son.

Now, it has also caused a sensation in the derivatives trade related to some of these new investments, which has shocked veterans of the market. “These are some of the biggest deals I’ve seen in 20 years,” said an American hedge fund manager specializing in derivatives. “The flow is huge.”

The surge in call option purchases – derivatives that give the user the right to buy a stock at a pre-agreed price – has been in the spotlight in recent weeks, as the sheer size of transactions appears to have exacerbated a “merger” in many major tech stocks over the summer. Tesla shares climbed 26% in less than a week to September 1, while parents of Amazon and Google Alphabet gained around 9%.

One person familiar with SoftBank’s trades said it was “gobbling up” options on a scale that even made some people in the organization nervous. “People are caught with their pants down, overwhelmingly short. It can go on. The whale is still hungry.

SoftBank declined to comment.

The options boom means the U.S. stock market remains vulnerable to further surges in volatility, according to Charlie McElligott, strategist at Nomura. “The street is still in a dangerous space, and that flow still exists,” he said in a note on Friday, adding that this leaves the market open to upward or downward fluctuations.

The aggregate face value of calls traded on individual U.S. stocks has averaged $ 335 billion per day over the past two weeks, according to Goldman Sachs. That’s more than triple the moving average from 2017 to 2019. The retail boom played a big part in the frenzy, but investors say the size of many recent option purchases is far too big to be. retail oriented.

Unusually, single stock call trading volumes have exceeded average daily call volumes across the entire US stock market and are almost as high as the level of index put options trading – this which gives the buyer the right to sell at a set price and act as a popular form of insurance against falling stocks.

The size and aggressiveness of the mysterious call buyer, coupled with the summer lull, has been a major factor in not only the good performance of many big names in tech, but also of the broader US stock market, according to Mr. McElligott. This week, he warned that the momentum around options meant heavy buying was forcing banks on the other side of trades to hedge by buying stocks, in a “classic feedback loop.”

It also helped explain the unusual view of the rise in the US stock market alongside the Vix index – often referred to as Wall Street’s “fear gauge” – and meant that stocks were fragile and vulnerable to the kind of sudden setback. which erupted on Thursday. “The equity volatility complex is acting ‘broken’ and indicates’ something’s got to go,” McElligott warned in a note shortly before the Nasdaq fell 5%.

A banker familiar with the latest options trading activity said the market pullback on Thursday would have been painful for SoftBank, but he expected the buying to pick up. A larger and more lasting decline in the stock markets would be more damaging to this strategy and would likely involve rapid declines, he added.

The purchase of options is accompanied by public investments of 10 billion dollars that SoftBank targets through its new branch of asset management.

According to a file filed with the Securities and Exchange Commission last month, SoftBank bought nearly $ 2 billion stakes in Amazon, Alphabet, Microsoft and Tesla – investments that are partially funded by cash from its sales program. $ 41 billion in assets that was triggered by a collapse. in its share price during the Covid-19 market turbulence.

Additional reporting by James Fontanella-Khan

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