U.S. stock markets tumbled yesterday following news that Bill Hwang’s Archegos Capital Management was liquidating $30 billion in assets to cover a margin call that went south.
The large sell-off was triggered by Archegos’ positions in something called a contract-for-difference, or a CFD. CFDs are a tool used by investors that allow them make an “agreement price”, upon which a security will be bought/sold for.
The difference of the agreed price and the actual price is paid by either the buyer or the seller depending on which way the stock/security moves. More importantly, investors can leverage these bets with only 10-20% of the actual amount of the agreement. This means that investors only have, at most, 20% of their margin (amount owed should the deal go against you) on their books.
In reality, their margins are much higher, allowing for investment funds like Archegos to place several of these CFD bets while minimizing the amount of capital required to make the deal. Financial experts and investors consider CFDs a “very risky” bet, and the practice is illegal in the U.S. but not in Europe.
Due to the sell-off, ViacomCBS and Discover Inc. took substantial hits to their stock price yesterday, with Viacom in particular losing over 6% of its value.
Global investment banks Credit Suisse and Nomura Holdings of Japan were also affected by the trade. Archegos attempted to obscure the sheer number of CFD holdings they purchased by using multiple banks to make the trades, causing Credit Suisse to tumble over 11% yesterday. Nomura Holdings fell over 16% following the news.
U.S. markets now prepare for a Tuesday open much lower than anticipated, though tech stocks seemed to squeak out of the deal with relatively few losses.
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