What Is a Total Return Swap and How Did Archegos Capital Use It?

Over-levered. With the news over the weekend that Bill Hwang’s Archegos Capital Management investments in Baidu, Discovery, Fartech, Shopify, Tencent Music Entertainment, GSX Techedu, iQiyi Inc, VIPShop and ViacomCBS were liquidated by their prime brokers all eyes are how this happened.

JPMorgan’s Kian Abouhossein wrote that the losses may range between $5billion and $10billion for the banks trading with Archegos.

In the coming weeks, we will no doubt see more information presented to the broader investment community, however, so much leverage could be extended to one institution and what triggered the fire-sale process to de-risk will be the focus of intense scrutiny. We suspect regulation is coming down the pipe, we hope this is driven by transparency and not outlawing products per se. Expect to see a re-pricing of risk from the prime brokers in the coming weeks and months as they reassess how they price, trade and risk manage this previously perceived low-risk business.

Our CEO, Stephen Howard, was interviewed by the Wall St Journal online overnight on the topic of Total Return Equity Swaps. To read the full article, visit The Wall Street Journal:

https://www.wsj.com/articles/what-is-a-total-return-swap-and-how-did-archegos-capital-use-it-11617125839

Clubhouse and Asymmetric Returns

Our CEO, Stephen Howard, participated in a Clubhouse Discussion within the “Asymmetric Returns in Investing” room this morning.

Led by Geoffrey Chen and Kay Van-Peterson, the discussion revolved around portfolio construction, understanding risk appetite, how derivatives can be used to support portfolio optimisation to better manage risks and investment positioning.

Commenting on the discussion, “…Clubhouse is a fantastic medium to have a closed-form, deep-dive discussion into a topic. The two interviewers did an excellent job of shaping the landscape and helping to draw insights and observations. Interesting that we had participation from Japan, Hong Kong, Singapore, Europe and the US – truly a global platform.”

Restoring Trust in the Stock Market

Our CEO, Stephen Howard, was quoted over the weekend in The New York Times Dealbook Section. 

Earlier in the week, award winning journalist Andrew Ross Sorkin’s “DealBook” column raised the challenge to readers of “How you’d fix the market” soliciting input from readers on how we might restore trust and fairness in the stock market. After receiving a ton of thoughtful submissions these were included:

  • “Have a zero percent capital gains tax on securities held more than two years. This would encourage long-term investing at the expense of short-term speculative trading.”— Bob Knutson in St. Paul, Minn.
  • “Limit how much of each new issue the big guys can grab and let the small fish get their nibbles first.”— Miriam Kelly in Baltimore
  • “Restore the uptick rule.”— Andrew Oliver in Marblehead, Mass.
  • “Buying back shares should not be allowed. It does nothing for the value of the company, nor does it lead to better investment performance.”— Joyce Hum in Ottawa
  • “Limit the total percentage of float allowed to be sold short. Anything over 100 percent seems to be a recipe for a short squeeze.”— Dan Niemiec in Chicago
  • “Have the exchanges process market orders in a manner that nullifies the machinery of high-frequency trading, like adding a random delay of between five and 15 seconds to any market order.”— Ronny Lempel in Redmond, Wash.
  • “Go to T-0 Equity Settlement, which reduces the overall credit exposures from trading T+2. Before anyone objects to the technical challenge, it is definitely possible as the China A share market operates this way.”— Stephen Howard in Hong Kong

Commenting on the quote, “…it was great to participate and offer my insights and suggestions, fantastic that one of them was reflected in Andrew’s column. We are all very interested to see what happens next.”

The New York Times DealBook

Congratulations January 2021 Interns!

2021 marked the start of our internship programme which will run throughout the year. Successful candidates will complete a bespoke three week project on a topical area within financial markets, developing analytical, communication, markets, organisational, presentation, report writing and teamwork skills.

Congratulations to our first two interns who completed our January Remote Internship.

– George Kwok, completed a full analysis on Cryptocurrency Mining solutions. 

– James Lam, completed a full analysis of Cryptocurrency Derivative Trading platforms.

Wishing both George and James the best with their studies at Hong Kong University of Science and Technology. Again, well done.

Our previous interns have gone on to work in Credit & Equity Derivatives roles within top tier investment banks.  If you are a high quality candidate, enjoy challenges and are looking for a financial markets internship during 2021 please reach out to our recruiting team at “recruiting@howard-trading.com

2020 Full Year Earnings

We are pleased to announce our Private Company Trading Results.

Our business generated a 34.15% return for the full year of 2020 on our capital base.

Q1 was dominated by the global spread of the COVID19 virus and the concurrent economic shutdowns. For markets, this resulted in a massive re-pricing of risk assets with commodity, equity and fixed income volatility reaching all-time highs as spot markets dropped and even safe-haven assets declined as investors sought liquidity.

Q2 brought a bifurcation between markets and the economy. The start of an equity market rally centred around technology stocks and massive fiscal support programmes counter-balanced the re-structuring / bankruptcies across airlines, hotels and retail sectors. The Russia-Saudi oil price war intensified and as structural flaws in certain retail derivatives became apparent this helped to drive WTI futures into negative territory.

Q3 confirmed the US Federal Reserve would move to use average inflation targeting and imbed a narrative of “lower for a lot longer”, while Central Banks globally continue to ask policymakers to deploy more fiscal resources into the economy.

Q4 crystallised Novembers event risk in the highly contentious US election, delivered multiple vaccine solutions, confirmed a US Fiscal Stimulus package with ongoing Federal Reserve Support, announced Yellen’s return, the Tesla inclusion into the S&P500 went without a hiccup, Santa Claus delivered to the parents as well with the year-end crypto asset rally. So with all the key market events absorbed into the market pricing the question is are we priced for perfection?

Looking forward to Q1 2021 we continue to see risk and derivative markets pricing (and mis-pricing) material volatility in several pockets of the market, we see two principal, and frustratingly conflicting, risks ahead; the deflation and the inflation narratives.

The risk factors we are watching within derivative markets are the pricing of forward earnings and dividend distributions needed to support extended price ratios We are being selective with pockets of volatility exposures in 2021 our current focus is within Commodity Assets, Financial, Healthcare and Taiwanese equities. While we remain cautious on the 3rd wave of COVID infections, keenly focussed on any material re-structuring & bankruptcies (retail, airlines, food & beverage, cinemas) and any dislocations in the operating structure of credit markets.

We’d like to thank our trading execution partners from Interactive Brokers, IG Index and Saxo Bank. Thank you to both Chatham House and Geopolitical Futures for their unique perspectives.

Re-affirming our social commitment we continue with our 2020 donation programme into 2021 with Feeding Hong Kong.

Happy New Year!

With 2020 coming to a close, and having been full of challenges for everyone, we want to send our best wishes to all of you. We hope 2021 brings greater opportunities and success for you, your family and your business.

From all of us at Howard Trading Limited, Wishing you a very Happy New Year!

Unknown Market Wizards Book Launch

Mark your calendars! There’s only one week to go before International Bestselling, Author Jack Schwager’s latest book, “Unknown Market Wizards” hits the market.

Learn from exceptionally successful traders and how they achieved extraordinary results. Jack Schwager takes us to a world of trading wisdom and insights, with a touch of humour including revelations about the human side of trading.

“Unknown Market Wizards” is published by Harriman House Books and we are excited to be a partner for the launch!