OnlyTicks

There is a specific kind of intelligence that is almost never celebrated but is consistently effective: the intelligence that recognizes when the game being played is not the game worth playing.

Have some time to kill at the airport and in a writing mood, so just some off the cuff thoughts on the state of the HTB shorting, why I think the game is continuing to get more competitive, and some reasons as to why I believe the alpha in pure systematic short selling edge is an ever-decreasing quantity from year to year and more discretion/adaptation will be needed to play this game in the long term. 1. Edge erosion – this sort of encompasses all of the points below, but in particular I’m referring to more and more short sellers using the same strategies. This leads to reduction in alpha for a given strategy. Crowding of a strategy leads to more market efficiency leading to liquidity hunts, more demand for borrows, noise in patterns, etc. It’s not hard to see countless examples of patterns with massive EV that have either died completely or now provide very small EV. Examples: Chinese liquidation, resistance short, Day 2, vanilla OPB, etc). 2. Market data services – services such as flashresearch, spikeet, etc have lowered the barrier of entry for accessing data essentially “dumbing down” the process for anyone willing to spend $50 on a monthly subscription. In the past accessing this data required coding knowledge and limited the alpha to a select few that were willing to put in the work to access it. I’m also of the opinion that posting these statistics to a widespread audience on twitter or large discord chats is a contributing factor to squeezes. Examples: Day 2 setup being posted on twitter, red close probability of a particular gapper, etc 3. Filing/dilution services – services such a dilution tracker and askedgar have “dumbed down” the filing process to the point where anyone can figure out the agenda of a small cap move. In the past, this edge was limited to those that would spend the time going over the dry filings. Full transparency: I use them myself as I rarely have the time to comb through filings. Examples: TNON pm squeeze when shorts expected an offering, squeezes over warrant levels, etc 4. “Smart money” longs – Since 2022, the long side in small caps has gotten significantly more intelligent. The days of buyers chasing HOD breakouts are long gone and the long game is populated with savvy dip buyers and hyperscalpers. Bagholding a small cap is now a pretty outdated concept and this explains why “resistance shorts” don’t work well anymore (no real sellers at previous levels) and are often just clearout levels. I’m of the belief that the alpha is shifting more and more to the long side of small caps as the short side becomes more and more crowded as the “standard side” of small caps. 5. Educational services – Discussion of topics such as cycles, broker max losses, etc has made the game a lot more competitive. The short side is now more cognizant of cycles and themes leading to more irregularity (hot/cold behavior oscillation) in behavior. Moreover, with folks using the concept of R and implementing broker max losses, post short seller “blow up days” have less resolution and there is slower bleed out of short sellers vs outright blowups which in the past would provide for long “clean price action” periods. 6. Ease of access to HTB shorting – Anyone can now open a HTB shorting account with ocean securities or TZ. In fact, a new trader can fund with as little as $2k and have $12k in leverage for shorting. In the past there was a barrier to entry to where you couldn’t have any trader short sell. Now short selling has become the “standard game” for small caps and anyone can borrow a low float stock. This crowds strats, injects more noise into price action, increases demand for locates, etc. My pessimistic outlook is that the systematic/quant side of small caps will continue to get more competitive and the alpha will be a monotonically decreasing function with time. One doesn’t need to look very deep into the data to see that there is a lot of change year to year and reduction in EV for the most popular strats. There will be a gradual transfer of alpha from the standard short side to the long side, but I suspect discretionary shorting will retain a lot of its edge. Adapting will be key as this game gets more and more crowded on the short side. The only saving grace for systematic shorting is if there continues to be an abundance of opportunity to compensate for lower EV trades, but this too becomes challenging as the “outlier squeezes” become more normal and aggressive. One needs a lot of offsets to make up for ever increasing massive squeezers. Just my two cents given that this prolonged cycle has been particularly brutal for pure system shorts. That being said, I believe the points above have affected small cap behavior since around 2022; however, the effects have been amplified as of late and I suspect they will continue to be more and more detrimental to the systematic short side. $CURR $XHG $SILO

TODD BLANCHE: “We’re not going to prosecute the predators in the Epstein files and we’re not going to release their names to the public.” Sick.