Atlas Shrugged


11 November 2018

Chapter 1

The arrival, on the 6th of November, of notification that all 6.257M of the outstanding warrants held by Atlas were being exercised has resulted in a situation where there are now only 3.6M warrants left remaining and these are held by Wogen, our metals trading partner.

To understand the possible importance of this event we need to go back and look at the trading over the last couple of of months, and specifically consider the way in which Market Makers have repeatedly sold short on the share. 

The accumulated Market Makers nett trading position from the 5th of September calculated from the daily analysis of each days trades is shown in the graph below.

Recall that the Vametco strike started on the 5th of September. Over the next 6 days the Market Makers sold more than 6 Million more shares to PIs than they bought from us. And despite this huge imbalance towards PI Buys the share price fell - how come ?

Quite simply one of the Market Makers was betting on the strike dragging on and them being able to source these 6 Million shares at a lower price than they sold them for (around 21p). So they kept selling shares that they did not have, at lower and lower prices, flooding the market.

They were selling short and all looked good for them ... until the 13th September announcement that BMN had been able to buy out the remaining Sojitz share of Vametco (increasing their stake to the maximum allowed 74%) - their short was wrecked as the huge increase in buying forced the price up over 25p. Evidently they were not in a position to extend their short exposure over 7 Million shares.

We speculated at the time that perhaps the short had been backed by the Atlas warrants, and hoped that they would perhaps fall at that point. Instead it turned out that starting around the 18th of September the Market Managers managed to obtain something like 7.5Million shares from First Island, closing their short position, albeit at a loss, and then going further to create a long position which they then took forward and sold into the 31p peak. First Island came to their rescue and the Atlas warrants were safe.

Having made money on their long position it would appear that the Market Makers reverted to type - selling short from the 8th October - it would appear that with the Atlas warrants still in place they still had a safety net that allowed them to brazenly sell short. Unfortunately for them buying pressure did not ease up and on the 17th of October they were forced to double up on their short position in response to a large worked buy of 1M (appeared on the 18th but evidently started on the 17th).

As you can see from the chart above the MMs were still not getting particularly close to closing their short by the end of trading on the 29th of October, though they had managed to knock the share price back to just below the price that they managed to get when originally selling the 4-5M shares. But ... everything changed the very next day.

Chapter 2

On Tuesday the 30th, the arrival within the first few minutes of trading, of a trade of 15 Million shares caused barely a flicker of recognition in the share price. This trade did not however go unnoticed in that day's trading analysis or the LSE board. We all wondered what this omen signified.

We waited patiently - was it First Island or not ? A sell by First Island to Market Makers would inevitably require some kind of complementary Buy by another party as the Market Makers quite simply would not sit with such a huge share position on their books. We sat and waited for the complementary trade, but it never came. What was going on ?

From that point, however, the share price started to take off - evidently the selling overhang, which had been present at the end of September, and appeared to return after the 18th of October had lifted. Was First Island out, or simply resting ?

Another thing that started around the 30th of October was the appearance of large delayed trades, regularly appearing a day late. Regular as clockwork, these trades came for the next 6 trading days:

On closer inspection these trades all turn out to be Sells. Not only are they all Sells but they are Sells at a systematically lower price than the Sell in the market immediately before them:

So there is a significant seller who is regularly getting taken advantage of at the end of each day. Hmmm... interesting.

What else can we discern from this ? - well the day's delay in reporting this trade to us is an interesting development. It means that the MM trade position calculated at the end of each day will be wrong, and will only be corrected if you go back and insert the delayed trades back in the daily trade data and rerun the whole shooting match.

As you can see from the topmost chart the nett MMs trading position doesn't seem to have budged much since the 21st of October - it still appears to be hovering around the 4-5M short mark - the MMs appear to be balancing their books and keeping the short going. However, that chart is created using the trade data as it is presented to us at the end of trading each day.

Everything changes when correctly take account of the late revealed trades:-

It turns out that the Market Maker's short position has, since the 15M Buy on the 30th October, been systematically rolled back. They have reported this in such a way as to deliberately cover the fact up.

The delayed trade reporting behaviour lasts for 6 days and then ends at precisely the point that the MM short position is almost perfectly eliminated. The end also coincides with the point that the Atlas warrants announcement was made. These coincidences lead me to suspect that these events are intimately related - that the Market Makers have pre-sold the Atlas warranted shares, and used them to close their short position.

Why did they need to start calling in the Atlas warrants - well they had tried for three weeks to get a short to work out but were still not getting very far with it. Then on the 30th of October a 15M share trade turns up - now it seems evident that this was not mediated by the Market Makers but was more likely a Direct Market Access (DMA) transaction between someone who wanted shares (unknown) and someone who was clearly selling shares (First Island I'm guessing).

At this point I believe that First Island stopped releasing shares in 250K+ blocks to the Market Makers - after all they had now found someone better, who would take many millions in one go. 

Suddenly the MMs go-to seller evaporated - they had no choice but to call in the Atlas warrants.

They are no longer short, and the share price has risen strongly in the last 10 days.

And, most importantly, without their warrants safety net they may not be going short for some time to come.

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