You are welcome MB. The response is long but you asked for it. Thanks for pressing me into this service. The speculation below is the extended version of what was presented earlier without data. Hope you enjoy it.
Answer to the previous post
The selectivity is not unfair since it is not an argument against the idea that Ackman was involved, which is a possibility. It is more directed at encouraging a corrective towards greater precision in the model you suggest. Those correctives can happily be worked with to further fill out the suppositions of Ackman's involvement. It is continued below.
1. Candidly using "about 6.00" does not indicate a range. The corrective does - $5.70s and $5.80's on March 10th and on March 11th the range is $6.00s and high $5.00s. The actual range prior to 1:15 pm on March 10th is $5.88 to $6.35, a spread of $.47 in pricing.
For consideration in the Model
Shares Traded and Cost - March 10, 2:00 pm to 4:00 pm - 9,657,872.00 shares - $55,820,967.73
Shares Traded and Cost - March 11, 9:30 am to 1:15 pm - 43,826,570.00 shares - $268,653,819.96
2. Further, Ackman's actual FNMA acquisition trades indicate he ran through a range of prices ($1.54 to $2.94) to obtain his shares, which I am unsure as to the reasoning in doing it that way when it could be done in fewer than 28 trades and in a much tighter range at lower cost. Would he follow the same pattern when selling and buying (SC 13Ds show he does the same pattern in other purchases). If so, the range of prices he sold or bought could be $1.40 or more apart and greater than the range of $5.70s and $5.80's on March 10th and greater than $5.80s through $6.35 on March 11th. Given the original projections in the model compared the actual, he would have to have done so.
This sort of discussion so far focuses on Ackman's trading and what we know of it. So the spread would have to wider given the original projections of shares sold and the actual shares traded in the $5.70s and $5.80's on March 10th and the shares traded in the $5.80 to $6.35 on March 11th.
Q: To accumulate shares, how many shares, and in what range or ranges, and at what times did Ackman purchase to add to his accumulation in the model presented? (This information may be found in the future as an amendment to Ackman's SC 13D (SC 13D/A) if Ackman bought shares).
Issues
3. Because of the opacity of the OTC marketplace from the vantage of retail, the actual identity or identities of the source of shares is beyond actual reckoning without having inside MM info, institutional DMA trading through ARCA information or a report from Ackman. Speculatively, anything can be imagined. So we (I am) are left for the moment with a mystery of who actually is in involved and how did it happen.
Q: In the model presented, how can we identify Ackman's selling in the $5.70 to $5.80 price ranges (and greater) that occurred between 2:00 pm and 4:00 pm on March 10 and selling in the the high $5.00 and $6.00s (and greater) in the morning prior to 1:15 PM?
Even if the identity of a single source of a millions of shares is a mystery at the moment, the actual fall in price has observable features tied to the operational infrastructure of the OTC marketplace that let's us know at least the outlines of the drop beginning at 1:15 pm mark.
Operational Infrastructure
Only MMs are allowed to directly deal with the order book and to make one bid and one ask quotation at a time. Market prices are directly signaled by a limited number of MMs and subscribers to the OTC LInk ATS. That is the first place to look for price control and direction.
MMs can trade among themselves in an inter-dealer network made possible by MMs linking trade desk terminals via OTC Dealer and OTC Fix and other proprietary software to the OTC Link ATS. FNMA and FMCC shares can be tradeed even if there are no orders from retail or institutional.
The MMs manage all orders and retail cannot see what each MM is doing with the orders or see the full depth of the order flow. Each MM has an order flow that is composed differently than other MMs. Broker dealers (ETrade, Scottrade, Ameritrade, etc, ) route orders to MMs according to their needs and MMs pay them for that service. Naturally, some MM firms are more competitive than others, and as a result, they have more order flow from broker dealers s (i.e. NITE, ATDF, CDEL, CSTI, etc.). There are about 50 to 59 or so MMs that are active and 10-13 execute 79% to 85% of the monthly trades on the OTCQB.
Orders are filled, executed by MMs. Order matching and execution can be done manually by each MM but perhaps more usually by automated order management systems and algorithmic trading programs. An order fill can be made in less than a second or it can take minutes or not all depending on routing and the MM that receives it (NITE vs RAFF) and the conditions in the interdealer network and OTC FNMA and FMCC marketplace.
The bid and ask quotes are made by the MMs and it is based in the order flow coming into their order books (including their own orders) and placed by time or arrival (earliest first) and ranked by price. So an MM can see all the orders in the order flow, their prices, quantities, and types (short, long, limit, etc.). That is the marketplace.
The bottom level of analysis asks what does an MM employee do in front of a Level III terminal? What is that like? What one usually hears is that a MM man or woman is manipulating prices though no one says exactly how that happens. If the speed of execution of time and sales is examined it ought to be clear that one person is not manipulating each order by finding a match manually and clicking execute or setting up prices and changing them one by one by one manually in competition with other MMs.
The speed of the quotations and their changes and the speed of times and sales per second or per minute is the clue.
We can know that there are a thousands of GTC (good till cancelled) retail orders made and pending the night before and then thousands more during the day that flow into a MM trading system via the various broker/dealers that route orders to them from throughout the US. So how are all the orders handled? How does it work that your order gets filled completely, partially or not at all?
The OTC Link ATS allows access to different proprietary automated trading software like FlexTrade's order management system software - FlexOMS and ColorPalette. The MMs set parameters, algos, and orders are matched, and executed at the prices or better than the prices asked (limit orders) in the order flow.
This means that there are competing MM trading desks that are pushed and pulled by demand and supply and order flow is, more or less, automatically handled by software that works to fill those orders and while maintaining an orderly market.
Trading Context
Increasing positive Interest in FNMA broadened after negative news dwindled to nearly nothing in the 4th quarter of 2013 till three days ago. Ackman's unknown purchasing that boosted share price in October to mid-November. There was an increasing share price and consolidation in the $3 range. Negative reform bills were acknowlwedged in the media to be dead in the water with midterm elections. "Winding down" becomes "reform." Very positive GSE earnings reports are announced with continued housing recovery. The media changed its tune to having only positive things to say about the GSEs. Berkowitz pushes for FNMA and FMCC on all fronts. Ackman's multi-million dollar common stock investment was announced. The court cases move forward with discovery granted. Public valuation of FNMA and FMCC share price is stated as 10-15 times current value in the media. The share price goes leaping through the air with two trading weeks of significantly higher volumes. The Fannie Mae Board reached over 325,000 posts read and comes back to its number one position. All is right with the GSE stockholder's world.
Increase in Holding and Transfer of Shares
With all the positivity over several months, the interest in the GSE stocks increased and they became more and more attractive to trade or hold. This led to an increase in share price and volume of trades.
More purchases were made and more people sold all or part of their holdings. Though we cannot know what the actual percentages are, there was an increase in holdings of some owners as well as a transfer of shares to new owners. One need only think about the 115 million shares purchased by Ackman. From whom they were obtained? This was a significant transfer of shares. Day traders also increased their interest and traded.
"Stranded" Shareholders
As the share price moved past $3.50 to $4.50, shareholders caught with shares with those prices in May's falling knife but held, began to have unrealized gains that offered the possibility of continued gains as the price exceeded $4.50 to 5.45 and upward. These shareholders joined the new owners, day traders, short term traders and increased holding owners etc. A new shareholder population was generated over the past six months
Shareholder Emotional and Knowledge Conditions
For informed retail and institutional investors, investing in the GSEs stock is still a speculative trade with an increasingly positive reward/risk ratio. For experienced day traders, the GSE stock is an ATM. For those not well-informed or inexperienced as investors or traders, and/or those biased towards an imbalanced emotional positivity, the GSE stock poses a financial risk when unrealized gains are suddenly challenged by shares prices dropping below expectations due to news and other external circumstances having nothing to do with fundamental value of the GSEs. Also, with the vertical march upward in share price, looming memories of May 29th and the fear of another falling knife and long recovery period may appear to those without a clear understanding of the differences of the base between now and then. All of latter comments can contribute to an impulse to jump out of the stock at the wrong time with a price decline to save unrealized gains and in doing so, lose share position or earn less or take a loss of some amount when exiting an on the way down trade.
March 11th
On March 10-11, one could expect a correction after three weeks of significant price gains without consolidation. A 20 cent decline would not faze most shareholders. This especially so since such drops already occurred in the previous weeks.
Surprisingly, the announcement of a bill that already was known to be a tweaked version of a failed bill was emotionally and fearfully coupled with the consistent declining share price by those who did not know this fact. A dead issue was resurrected as a real possibility in the minds of some shareholders. Fear and panic arose for some. Trading opportunities opened for others.
If the price did not steadily decline, there would have been no panic.
So how did a price decline in a smooth diagonal from from $6.07 to $3.30, a slow decline of $2.71 in 1 hour and 30 minutes on insignificant news that was reported as such two days later?
FNMA Historical Prices
Date Open High Low Close Volume Adj Close
Mar 12, 2014 3.30 3.79 3.20 3.54 124,357,900 3.54
Mar 11, 2014 6.02 6.35 3.25 4.03 214,434,000 4.03
Mar 10, 2014 5.48 5.85 5.30 5.82 30,338,600 5.82
Mar 7, 2014 5.50 6.00 4.96 5.33 58,571,100 5.33
Mar 6, 2014 4.96 5.45 4.90 5.45 47,636,100 5.45
Mar 5, 2014 4.71 4.98 4.65 4.86 27,632,400 4.86
Mar 4, 2014 4.68 4.77 4.63 4.70 18,770,400 4.70
Mar 3, 2014 4.54 4.75 4.46 4.56 34,715,000 4.56
Feb 28, 2014 4.71 4.80 4.40 4.80 37,640,100 4.80
Feb 27, 2014 4.58 5.00 4.39 4.67 97,974,200 4.67
Feb 26, 2014 4.21 4.51 3.94 4.47 81,809,600 4.47
Feb 25, 2014 3.65 4.05 3.58 4.04 41,335,500 4.04
Feb 24, 2014 3.34 3.62 3.33 3.58 43,759,800 3.58
Feb 21, 2014 3.27 3.41 3.26 3.28 18,440,500 3.28
Feb 20, 2014 3.39 3.39 3.20 3.29 26,183,600 3.29
Feb 19, 2014 3.14 3.40 3.13 3.40 39,762,000 3.40
Feb 18, 2014 3.06 3.12 3.05 3.12 9,227,600 3.12
Feb 14, 2014 3.07 3.08 3.04 3.06 3,782,400 3.06
The Price Drop
The price drop was a gradual, measured and smooth decline with volume increasing more or less as time passed for exactly 1 hour and 30 minutes before the bottom was reached at $3.30 and an upswing began.
Shares Traded and Cost - March 11, 1:15 pm to 2:45 PM - 51,806,671 shares - $225,956,380.71
The drop accounted for only 24.1% of the total shares traded in 9,159 trades. That is 101.8 trades a minute or at least 1 to 2 trades per second minimum up to 13 trades or more per second ( I did not do a precise statistical frequency of trades per second, just eyeballing it for a few thousand trades).
The speed of quotations and trade executions indicates that MMs are using automated quotation, order management and execution systems to quote, match and execute trade orders.
These systems also allow the use of trading algorithms.
So here is one speculation on the proximate factors delivering the price drop.
One Speculation
At 1:15 pm, a downward movement was initiated by one or more MMs using the the news about the Johnson-Crapo bill as downward trade "catalyst" after trading sideways as if in a holding pattern.
The MM executions drove the price down by quoting and executing at a penny or more lower price than the previous price in share lots of 100 (mainly), 200, 300. These lots are correlated with all prices in sequences and in the tick data they appear after higher prices in a tight spread that sometime inexplicably would increase 25% or more above the $.01 spread and then back down to a penny difference between trades. Sometimes these small lots traded are higher (200, 500, 1000) but then a lower one comes in. This is a walk down.
As the walk down continued to occur there was a noticeable increase in volume within some of the minutes and over the series of 90 minutes leading to 2:45 pm and a closing price of $3.30. After that the share price rose during 32 minutes (2:46-3:18 pm) from $3.34 to $4.39 and then declined for 42 minutes to close at $4.02 at 4.00 pm.
In this downward process to $3.30, there was a transfer of 51,806,671 shares at a cost of $225,956,380.71.
We can ask the following questions about those 51,806,671 shares traded in the drop.
Who provided the shares? Who received the shares? How many shares were purchased to open a short position or to cover a short position? Who lost and who gained by the price drop.
Simple answers to the latter question are shorts who covered at $3.30 for a gain. New traders or investors entering at $3.30.
Their are no names attached to the tick data. But it is clear that there are are those who could well afford to trade with an exit gain and entry cost of $100,000 to a high of $5.05 million. During the downward period of i hour and 30 minutes, 27,368,054 shares at a cost of $119,998,046.54 were traded in 437 trades costing $100,000 to a high of $2.47 million.
So, 4.7% percent of the trades (437/9,159) costing $100,000 to $2.47 million accounted for 53.1% of the money put out for the trades and 52.8% of the total shares traded during the drop.
Though the cutoff of $100,000 (versus $99,999 or $50,000) is arbitrary, these figures provide a clue that these trades were made from buy and sell orders from MMs and/or large retail, institutional or fund traders and investors. Just think for a moment about how can a buy or sell order for a million dollars worth of stock get matched to another on the other side of the trade? Compare this to small retail being unable to get 5,000 share order filled. There were prearrangements.
Also, this cutoff does not represent large orders that may have been broken up into smaller orders to avoid impacting the market price. And there is the rub again. Why impact the market by having these "huge" trades go through and seen on Level II? What do small retail traders feel when this is seen? Anxiety? Fear? Panic?
Another anomaly is that there was no bottom for 1 hour and 30 minutes. The one place a bottom seemed to appear was at 2:05 to 2;08 PM pm where the price went sideways for 4 four minutes and up and closed briefly higher. Traders thought this was the bottom of the decline and time to buy in for the bounce. Not so, and down it continued.
Without any bottom and bounce, the price dropped precipitously in slow motion as fear and panic mounted as gains seen in accounts ticked slowly out. Naturally, it can be expected that some stranded shareholders got out with the inexperienced traders and investors. This added to the volume of exit centered trades. Greed grabbed shorts as the price dropped and being unable to know how far it is was going down. Greed held some shorts until the very end since they could not find the bottom yet and fearing they would be boxed out on a bounce.
All in all, the slow motion free fall was not a result of FNMA a investor/trader response to insignificant news since the news appeared at 10:30-11:00 am or so and there was no impact until suddenly at 1:15 pm the drop started.
Given the speed of the executions, it was likely to be an algo or algos driven first by one or more MMs using the Johnson-Crapo bill as a catalyst to walk the share price down. Evidence? There was little resistance anywhere in the drop to increase the bid price. No bulls seemed to be around to increase the price over the downward trending small 100+ lot shares. The drop was allowed by all MMs and that being so, the inexperienced and stranded traders and investors panicked and sold into the decline. The small and very large traders investors who were going short jumped to selling shares to open short positions and ordering closing positions at lower prices ahead of the drop and thereby adding downward price pressure. All of this reinforced the drop while providing millions of shares to the market that were taken by whom? That is a mystery.
There were many receivers of shares during the long trek downward. However, their identities are unknown. We can at least say that most of them were accumulating at $5.00 to $3.30 since those on the buy side of the $100,000 to 2.47 million trades. Buy side trades in that price range account for 40.5% (20,983,667 shares) of all trades made in the drop and for 36.8% ($83,155,177.47) of all the money paid out.
The buy side of the trades also show that they were focused on the obtaining shares at lower prices since 76.7% of the shares were purchased below $5.00 and account for 69.3 % of all the money put out by the large buy side traders and investors.
This is one speculation MB.
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