Chinese Authorities Limit Short Selling to Help the Worsening Market 📊

🐺 Hi pack-mates,

This is Howling Markets, the market authority that regulates the news traffic and helps you learn everything about the financial markets!

Today we will be covering:

• Education: What Is Short Selling? 📉

• Crypto-Linked Stocks Surge as Analysts State “Not the Time to Turn Bearish” 💸

• Chinese Authorities Limit Short Selling to Help the Worsening Market 📊

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What Is Short Selling?

Short selling is a market operation that allows a trader to open a net selling position in the market, meaning that the trader will be able to profit when the security goes down in price, and will incur losses when it appreciates.

But how is it possible to sell something that you do not have?

Short selling works by borrowing the security from a holder, usually a dealer, and directly selling it in the open market. Then, to close the position, the trader will have to buy back the security and give it to the original owner.

However, it is important to know that when short selling we are borrowing a security, so we will incur additional costs compared to simply going “long” (i.e. buying) a stock, including the interest rate paid on the borrowed assets.

Finally, when you short sell, even if you are actually selling a security on the market, your account will not credit any new liquidity. The usual short selling margin requirement in the US is 150%, meaning that not only your broker will hold the entire revenues of the short sell, but they will also ask you to contribute 50% of the position with your own funds.

So, if you have a $1000 trading account and you short sell a $100 stock, your trading balance after the operation will become $950. However, once the share is bought back, your balance will go back to $1000 plus the realized profit/loss.

Crypto-Linked Stocks Surge as Analysts State “Not the Time to Turn Bearish”

After a long couple of weeks of capital outflows as investors were “selling the news” of the ETFs’ approval and FTX’s liquidation of Grayscale shares, Bitcoin has finally started gaining some ground, closing Friday’s session up +4.77%.

Such a forceful move came as 10x Research stated that it is not the time to turn bearish and that Bitcoin is entering 2024 with a strong macro-enviroment tailwind.

Together with Bitcoin’s performance, Friday’s session has been also characterized by the exceptional returns of crypto-linked stocks, such as crypto mining companies, crypto exchanges and companies which hold Bitcoins in their balance sheet.

Some of these companies can even be more volatile than Bitcoin itself, and most of them have closed Friday’s session well over +5%. For example, MicroStrategy, a software company that holds almost 190,000 Bitcoins, has closed the day +8.02%.

Instead, Cipher Mining, a Bitcoin mining ecosystem based in the United States, has ended Friday’s session up +16.53%.

Today’s Howling Question

And now, it is time for our howling question!

MicroStrategy (Ticker: MSTR) has been considered for a long time a proxy for Bitcoin price and as a way to indirectly invest in the world’s largest cryptocurrency by capitalization. Do you know which has been MicroStrategy’s Yearly return in 2023?

a)  -20%

b)  +80%

c) +160%

d)  +225%

e)  +345%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Chinese Authorities Limit Short Selling to Help the Worsening Market

As we have seen in a recent newsletter, China’s stock market performance has been extremely poor over the past decades. However, due to the introduction of snowball derivatives, it could significantly worsen even more in the short term.

Snowball derivatives were introduced to bet on the stability on the market, but after last Monday’s sell-off, many knock-ins have been triggered, causing significant losses.

As a response, China Security Regulatory Commission has decided to intervene by limiting short selling to “create a fairer market order” and suppressing a potential domino effect caused by the snowball losses.

In addition, Chinese authorities have also recently restricted capital outflows from the country and have promised further security landing limitations into play starting on March 18^th.

The announcement of these restrictions, made on Sunday, wasn’t welcomed by the market, which slid down almost 2% during Monday’s session.

Despite being true that short selling can magnify a market downturn, it is also true that this practice provides more liquidity to the markets, and it helps price discovery, meaning the ability of the market to efficiently price a security based on supply and demand.

So, limiting short selling can induce significant market inefficiencies. Do you believe that how the Chinese Authorities are handling the situation is the correct way of going about it?

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

On Friday, the stock market tried to extend its all-time high by rallying higher during the first part of the trading session, however it didn’t have enough strength to keep moving higher and the SPX closed the day down -0.07%.

On the other hand, the 10 year government bond yield continued to float above the 4% level, closing the day up +0.51%.

Answer

The correct answer is e) 345%

Despite being considered a proxy for Bitcoin’s price, MicroStrategy has proven much more volatile than the largest cryptocurrency by capitalization. Last year, MSTR closed +346.15% higher, as opposed to Bitcoin’s +155.68%

Howl-Worthy Memes 😂

🐺 See you next time!

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