Markets ended higher on Monday despite worries over a potential contagion scenario tied to one of the largest margin calls in history.
The Dow Jones Industrial Average ended up 98 points, or 0.30% at 33,171 while the S&P 500 closed out the day nearly flat at 3,971. The tech heavy Nasdaq Composite Index saw the most in term of losses, ending the session off 79 points, or a loss of 0.60 percent at 13,059.
The gains come as investors digest one of the greatest margin calls of all time.
According to a report by Bloomberg, Bill Hwang’s family office of Archegos Capital Management was allegedly forced by lenders to sell more than $20 billion of stocks Friday in a massive fire sale.
But, thanks to shares of Boeing, the Dow Jones Industrial Average managed a gain. Fueling Boeing was the news that Southwest Airlines Co ordered 100 of the smallest version of the 737 Max at deeply discounted prices, helping to strengthen Boeing’s first quarter sales and increasing confidence in the place after two fatal crashes.
Margin Call Brings “Dark Pools” into Question
Nonetheless, some investors remain on edge amid news that Archegos might have sparked a larger sell-off. The Archegos event has regulators again questioning the vulnerability of U.S. markets — just weeks after the Game Stop day-trading ordeal forced regulators to examine whether or not a group of overly leveraged investors could take down an entire market.
The issue is also calling into question the use of so-called “dark pools” — in which investors are able to make large trades without revealing their identity or their intentions.
Archegos Capital is said to have created sophisticated, complex derivatives products (known as CFDs, or “Contract for Differences”) that enabled it to allegedly amass stakes in publicly traded companies without having to declare its holdings.
Losses at Archegos are believed to have triggered margin calls for the firm — causing the forced sale of billions of dollars worth of securities.
A margin call happens when the market moves against a large (highly leveraged) positions. This means the firm with the position needs to cough up more cash or other securities to ensure its broker that the losses can be covered.
The danger is that if one firm is SO highly leveraged and needs to sell everything in a rushed, forced sale — than that movement ripples through the rest of the market with a domino-like effect.
But, regulators hope is that the stress tests put in place at banks following the 2008 crisis will help even out any risks for a domino effect. Nonetheless, Credit Suisse and Normura both faced losses after they admitted they could incur substantial losses related to the Archegos trades.
Shares of Nomura fell 14%. Credit Suisse lost 11.5%.