Explaining the Archegos Capital Collapse

The collapse of Archegos Capital shows us that Wall Street is ruthless and it’s not always the little guy that ends up in the gutter.

people at table with dropping stock chart

Most investors are well aware that Wall Street can be a dirty place. Retail investors in particular often come to the conclusion that it’s the little guy that always gets the short end of the stick. That’s not entirely untrue. Retail investors don’t have the same tools and frequently don’t have the same information as the big institutions. While the adage might be that Wall Street “screws” the little guy, what just happened with Archegos Capital shows that it’s not always the little guy that takes a beating.

Earlier this year I noted large put buying in Chinese Internet stocks. For those not familiar, a put buy is a bearish trade, looking for the stock to fall. Below were some of those trades that I am referring to, copy and pasted from my Daily Order Flow list:

March 24, 2021
Buyer of 5,000 IQIYI (IQ) April 20 Puts for $0.57 – Stock at 23.5
Buyer of 2,500 Weibo (WB) April 46 Puts for $0.90 – Stock at 51
Buyer of 8,500 Vipshop (VIPS) April 35 Puts for $1.25 – Stock at 38.4
Buyer of 5,000 JD.com (JD) April 70 Puts for $0.75 – Stock at 79

March 25, 2021
Buyer of 5,000 Tencent Music (TME) April 23/19 Bear Put Spread for $1.05 – Stock at 22

As we later found out many of these stocks were owned by Archegos Capital Management, which was a super discrete “hedge fund” that was forced to liquidate billions of dollars in stock from March 24 to March 26. In those two days of liquidation, it has been reported Archegos lost a whopping $20 billion!

How Morgan Stanley Profited off the Archegos Capital Meltdown
However, that isn’t where this story ends; in fact, this is where it starts to get interesting. As was reported by CNBC …

“Morgan Stanley sold about $5 billion in shares from Archegos’ doomed bets on U.S. media and Chinese tech names to a small group of hedge funds late Thursday, March 25.

“Morgan Stanley had the consent of Archegos to shop around its stock late Thursday, these people said. The bank offered the shares at a discount, telling the hedge funds that they were part of a margin call that could prevent the collapse of an unnamed client.

“But the investment bank had information it didn’t share with the stock buyers: The basket of shares it was selling was merely the opening salvo of an unprecedented wave of tens of billions of dollars in sales by MS and other investment banks starting the very next day.”

Essentially, Morgan Stanley knew that Archegos was blowing up very fast, didn’t want to take a loss themselves, and was trying to unload the stock on the hedge funds. However, what they didn’t tell these other funds was that the initial 20-50 million shares of IQ, VIPS and TME that were being sold was just the first wave of similar-sized sales. Basically, Morgan Stanley “screwed” these hedge funds as a result of the Archegos Capital meltdown.

Now, where the put buys come into play is another layer to this story.

Judging by the times/dates that the puts above were purchased, it appears either Morgan Stanley, or another fund, caught a whiff of the stock selling that was to come, and started initiating bearish bets against those stocks—therefore “screwing” anyone who was caught buying any of these stocks that were destined to tank.

The big takeaway: Wall Street can be a dirty place, and it’s not always just the little guy that gets beat up by the smart money.

Comments
  • harold s.

    I was also “screwed” by morgan stanley as part of this since I bought 1,000 shares of VIAC at $85/share while morgan stanley “prime brokers” had issued margin calls to Archegos and dumped millions of shares on the market at any price while morgan stanley “retail brokers” were selling syndicate customers at $85 and lost 50% in hours.

    Reply

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