The Archegos soap opera, which confirmed that the market is a cesspool of constant manipulation and where the only sin is getting caught, simply refuses to go away.
Three weeks after latest stunning development in what may be the biggest fall from grace in modern market history, one which culminated with the arrest of Archegos founder, and Tiger cub (ex) billionaire Bill Hwang, today Bloomberg writes that not long before Bill Hwang's massive leverage upon TRS leverage sent a handful of stocks soaring in early 2021 to record highs in what we now know was a premeditated and illegal short squeeze by Hwang and his traders, which eventually cratered in a waterfall of margin call days later, Archegos was caught in a short squeeze of its own, when a short bet by Hwang against a Chinese online broker, Futu Holdings, went horribly wrong.
According to Bloomberg, Hwang had placed a massive short bet on Futu using swaps (the same swaps he would use weeks later to himself create a short squeeze in a handful of heavily shorted and illiquid names), and wanted to close out his position around the end of 2020. He told Morgan Stanley he needed to buy a large block of shares to unwind the position, but before Hwang managed to defuse the bet, Futu’s price skyrocketed, gaining more than 400% in the two months after that Christmas. That jump took an almost $4 billion bite out of Hwang’s portfolio.
At this point the Archegos narrative crosses with that other developing story, that of Morgan Stanley's block-trading desk potentially leaking and frontrunning client orders to enrich itself and/or a handful of preferred clients, and led by Pawan Passi, a Morgan Stanley banker facing close scrutiny in a US probe of whether Wall Street is too loose-lipped when handling big trades.
Hilariously, in an attempt to deflect attention from himself and rat out a fellow (former) Wall Street pal, Bloomberg notes that Archegos had "alerted" US authorities to that costly episode after the emergence of the block-trading probe this year; Archegos, which itself is now the target of a criminal indictment, claims that it sought a review of whether someone at the bank might have tipped off outsiders to its plan to buy Futu stock in bulk.
To be sure, it remains unclear who squeezed Hwang’s short bet and whether they even knew they were targeting him. After all, Futu’s price surge coincided with last year’s meme stock frenzy, in which an army of retail traders organized themselves on message boards and set out to identify and lift shares targeted by short sellers. And yes, FUTU was massively shorted in early 2021, with the short interest collapsing only after Archegos got blown out.
Having canvassed the market in January 2021, in the end, Morgan Stanley's Passi didn’t manage to acquire a large enough block of Futu’s stock to help Archegos unwind its ill-fated bets. But the reason why the story never gained prominence is because the hit to Archegos’s portfolio on the short side, was soon dwarfed by its even more highly leveraged gains on almost every other part of its long portfolio, which in very short order soared, sputtered and then crashed, wiping out the hedge fund in a matter of weeks, with many unwitting Wall Street banks providing the leverage Archegos needed to pull off its criminal plan.
While it is far less exciting than the Archegos drama, the US probe of block trades does focus on whether Wall Street bankers have tipped off hedge funds to any pending deals. But accoprding to Bloomberg, Morgan Stanley, which has said it’s cooperating, hasn’t had any discussions with the government about a potential Futu transaction with Archegos as part of that inquiry.
Where these two stories cross, is that within weeks of getting burned on Futu, Hwang – having figured out how he can unleash on other the same pain he himself was subject to – became the scourge of other short sellers by driving up the price of Chinese online-education company then known as GSX Techedu, which some of the world’s most famous short sellers were betting against. When Hwang was eventually outed as their antagonist, they cursed his name and publicly called for probes into that, too.
The Archegos and block-trading probes do have a common theme — seeking to head off fraud and manipulation, US Securities and Exchange Commission Chair Gary Gensler noted in an interview last week. “It’s about protecting markets,” he said.
As for Futu, the company was listed on the US market with a stock offering in 2019, and was seen as the Chinese take on Robinhood, benefitting from a retail investing mania that took hold during early Covid-19 lockdowns funded by trillions in government stimmies. By the start of November 2020, the price had more than doubled from the IPO to around $30. But in just over three more months it jumped to $191. It even raised $1.24 billion in April 2021 after selling shares at $130 apiece. Since then, the stock has crumbled.
It’s unclear when Archegos began setting up its bet against Futu or how it structured the trade. The firm often favored the use of swaps. But as Bloomberg notes, its $4 billion hit from the trade is startling – the number almost equaled Futu’s total market capitalization in late 2020.
In their indictment, US prosecutors described Archegos’s final weeks: by last March, the firm’s attempts to artificially prop up a highly leveraged and unusually concentrated portfolio of bullish bets lost steam, according to the government. As prices started slipping, Hwang and colleagues stepped up efforts to manipulate prices and avoid margin calls, and then misled banks about the brewing crisis at the firm until everything came crashing down. Banks that had helped Archegos place bullish bets ended up racing to unwind those positions and were saddled with hefty losses. Credit Suisse Group AGsuffered a $5.5 billion hit, Nomura Holdings Inc. $2.9 billion and Morgan Stanley $911 million. It was not immediately clear if anyone lost money on Archegos short squeeze of Futu.