Are intraday traders masking underlying volatility?
The Efficient Market Hypothesis (EMH)is an investment theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. Where was the EMH yesterday when Tesla (TSLA) plunged 15% after their lockup period expired? Surely, investors knew that the lockup was expiring and should have priced the stock accordingly. According to Marketwatch ,”It wasn’t like the company didn’t warn investors a big selloff might be in the works. In November, Tesla filed the following report with the SEC: A substantial majority of our total outstanding shares are currently restricted from immediate resale, but may be sold on a stock exchange in the near future. The company then went on to pinpoint Dec. 27 as the date the exodus would likely occur, exactly 180 days after the IPO closed.” Short sellers tried to help by shorting 7.5mm of the 22 mm shares in the float but the stock would not give until yesterday. Did the “real” buyers of the stock just walk away yesterday? Or, was it that the added risk factor caused the “arbitrage” players to take a break but only for a day? We have seen this many times now when negative news comes out and a stock quickly gaps down to a level which it holds and then steadily creeps back up as if the news never came out (think V and MA last week).
We have been saying for quite some time now that the market has been taken over by the “renters” who care only about the next tick and the best way to arbitrage an offsetting position. They could care less what a company actually does or if that company is making money. But when news hits, they split and wait for the smoke to clear before starting up their sausage grinder again. The market knew about TSLA’s lockup but could not accurately reflect that in the security price because the overwhelming proportion of volume is now dominated by high speed automated market makers and their statistical arbitrage cousins who profit handsomely if they can keep their models in line and limit their risk. Their incentive is to flatline a stock so that they can make tiny market making profits and collect exchange rebates. Many will say that this is just market making evolved. But we think that this new market making is masking potential risks (as evidenced by TSLA yesterday) and time bombs that not only exist in individual stocks but also in the overall market.