(Important) Trend 269: A rare event—the top online brokerage's net buying reveals fear

Publication date: 2017/04/26 08:09

Yesterday was a typical futures-led market, but not the “up-and-down tight market” that the Algo-3 brothers staged at the end of last week; instead, it was a market that the brothers would be very pleased with, showing a tilt toward other firms.

The tilt was demonstrated by SBI Securities in the Nikkei 225 futures and BNP Paribas in the TOPIX futures.

In the Nikkei futures, SBI Securities had a net long of 1,885 contracts, and that was the “top net buyer,” which is unusual and alarming. Because institutional investors such as hedge funds and overseas pension funds do not use online brokerages.

As a prime broker, the ultimate settlement institution (the trustee, something like a trust bank), the administrator, and in English a three-party agreement (four if you include the fund manager) are arranged, and they liaise with the trustee daily; online brokers cannot do this. Moreover, having a single prime broker that can execute futures trades at extraordinarily low fees means there is no need to use online brokers.

That SBI Securities carried out 1,500 crosses off the floor. This is significant. It is speculative, but it suggests that the person who had been short selling Nikkei futures may have hit a stop loss (voluntary stop loss, or forced liquidation due to insufficient additional margin), and the brokers gradually bought 1,500 contracts during the on-floor session, finally using the crosses to buy back that person’s previously built short positions.

This was a complete “pressing” (squeeze) stop-out; for example, if shorts were built at 18,400 yen and closed yesterday at an average of 19,000 yen, the loss would be 900 million yen. Since crosses were used, it would be a single investment entity. Furthermore, it is likely to be an individual investor.

Thus, when there is movement like the “Super Tiny Tom Thumb” described in the “潮流” (Trend), the Algo-3 brothers ride the wind and glide through the market. Also, when arbitrage trading is present, whether it is arbitrage buying or unwind, it likewise serves as a tailwind.

The tilt in TOPIX futures was led by BNP Paribas with a net 1,645 contracts sold. A few years ago, in November-December, Europe bought a lot of cash, and the following year a strong market was expected. From domestic and foreign securities investment figures (they appear in the Asahi seminar materials when needed; a more detailed study even reveals country-by-country Japanese stock investment amounts), the purchases were by “the country most unwilling to buy” France, which led to the warning that this cash buying was arbitrage buying and would eventually unwind, and in late February of the following year the market collapsed.

There are virtually no hedge funds with investment advisers in agricultural France. However, there are securities firms (banks). I believe that arbitrage buying in that country accounts for nearly all of its demand for Japanese stocks.

That BNP Paribas was selling means that last week the firm reduced its net buying by about 2,300 contracts, suggesting either a stop-loss buyback by a trader who held a short position last week, or arbitrage buying (cash buying / futures selling) in a futures-driven rally.

I don’t know which, but the fact that the largest net seller in Nikkei futures was Nomura Securities with 915 contracts sold suggests that the firm engaged in arbitrage buying, consistent with the earlier note that the largest arbitrage group is major domestic securities firms.

To summarize.
Yesterday was a futures-led market. SBI Securities’ stop-loss buyback, BNP Paribas’ stop-loss buyback or arbitrage buying, Nomura Securities’ arbitrage buying, and the Algo-3 brothers rode the market as tailwinds.
No matter how you look at it, the names of institutional investors do not appear among the players.
There is also talk, without basis, that institutional investors bought in response to the French presidential election results, but the likelihood of this is low at present.

To illustrate with numbers. The combined tilt of the two leading prime brokers, Morgan Stanley and Goldman Sachs, yesterday was: Nikkei futures: 46 contracts more sells than buys; TOPIX futures: 59 contracts more sells than buys. Small indeed.
To reiterate: there is no basis for the claim that institutional investors were buying.