Glitch Now Traps Hedge Funds In A Massive Short Squeeze

A glitch now traps hedge funds in a massive short squeeze, with shares soaring in the first hour of trading on Friday.

On Friday, shares on the Shanghai Stock Exchange skyrocketed, with trading turnover hitting 710 billion yuan ($101 billion) within the first hour.

However, this surge was marred by technical glitches that caused delays in processing orders, as reported by brokerages to Bloomberg News.

The Shanghai Stock Exchange has announced an investigation into the reasons behind these delays.

Fund manager Du Kejun from Shandong Camel Asset Management remarked, “I only remember a trading delay like this during the 2015 rally, but generally, it signals a positive trend.”

He noted that while the disruption was minor for his firm, it could have been frustrating for others looking to increase their positions.

Goldman Sachs highlighted that trading volumes surged four times above the 20-day average, totaling over $9 billion, marking one of the largest trading days in the past decade with significant inflows, particularly into the KWEB ETF.

Despite the buying activity from long-only funds driving the China ETF market, hedge fund participation was relatively low.

The glitches affected several quantitative hedge funds, particularly those employing Direct Market Access (DMA) strategies, which suffered significant losses as they shorted index futures.

Some funds were unable to sell holdings to meet margin requirements due to the trading delays, and those using direct indexing faced similar issues during the turmoil.

These losses come on the heels of a challenging period for quantitative funds, which faced record drawdowns during a market downturn in February.

The DMA strategy typically involves using high leverage and holding long positions in individual stocks while shorting stock index futures.

The surge in index futures on Friday outpaced stock gains, leading to losses for market-neutral products.

“The losses on market-neutral products will likely be widespread today, and some DMAs may have had to liquidate,” noted Li Minghong, founding partner of Shanghai Jiutouxiang Financial Information Services.

This unexpected trading turmoil follows China’s recent economic stimulus measures, which triggered the largest weekly equity rally since 2008.

Despite this, many hedge funds remain net sellers of Chinese stocks in cumulative terms since the beginning of 2023, with current exposures at five-year lows.

“The trading system is simply overwhelmed.

There is a huge influx of stock bulls,” said Hao Hong, chief economist at Grow Investment Group, in a post on X.

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Also Read: Korean Regulators Now Impose Billions In Fines For Illegal Trading

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Other Market News Today

Roaring Kitty owns only two stocks according to filings with the SEC and fresh financial reports, per Investopedia.

Keith Gill, the former financial analyst known online as “Roaring Kitty,” is credited for the GameStop stock surge in late 2020, when he posted on YouTube and Reddit his belief that GameStop (GME) shares were undervalued.

Gill bought $53,000 worth of GameStop stock in 2019, valued at $48 million at the height of the GameStop surge in January 2021.

After stepping back from the public in June 2021, Gill returned in May 2024 with cryptic memes posted to his X account, followed by snapshots of his GameStop portfolio posted to his Reddit account, DeepF—ingValue, or DFV, in June.

Shares of GME surged at the time in response to Roaring Kitty’s return to social media and renewed interest in meme stocks.

On June 13, 2024, Gill shared a snapshot of his portfolio on Reddit, showing that his holdings included more than 9 million shares in GameStop, worth $262 million, and another $6.3 million in cash.

His overall net worth at that time was about $268 million, per Investopedia.

During a YouTube livestream on June 7, 2024—his first in three years—Gill shared his E*Trade portfolio on screen and revealed that his GameStop positions were his only investments.

In July 2024, a Securities and Exchange Commission (SEC) filing showed that Gill also owns a 6.6% stake in pet product retailer, Chewy (CHWY) stock.

According to the filing, Gill owns a whopping 9 million shares of Chewy.

Chewy was founded by billionaire Ryan Cohen, GameStop’s chief executive officer (CEO).

Gill praised Cohen during his livestream in June.

GameStop is currently trading at $22.29 at the time of this publication.

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Also Read: NYSE Is Now Reporting A GameStop Price Glitch

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