I wrote recently that the collapse from overvaluation of some parts of the global stock markets – with consequent short term risks for all market valuations – might come from a single relatively small incident, like a hole in a dike or dam.
Today’s news that at least 2 really large banks (Nomura and Credit Suisse) have taken significant losses after a US Hedge fund (Archegos) defaulted on margin calls is worrying.
If an investor has exposure to shares through derivatives (eg options to buy or sell), and the share price moves unexpectedly outside of its usual trading range, the investor has to put up more money to cover potential losses when the derivates settle (a margin call). If they have not got the cash to do that, quickly trading the underling securities (ie the one that are being betted on) is the best way that the counter-party can protect itself and once that process starts there can be a domino effect. If there are multiple counter parties (likely), the ones who act slowest lose most money and other investors in the stocks on question will see at least short term losses due to the unexpected volumes of shares coming to market.
This problem may just be of the ‘hole in the dike’ variety and the market may supply a Hans Brinker to plug the hole.
If not, expect unpleasant damage, possibly a coming in floods.
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