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SoftBank whale's Nasdaq splash spooks Japanese retail investors

Tech conglomerate's massive options purchases raise volatility concerns

Slack Technologies is among the companies whose shares fell after reports of SoftBank's massive purchases of call options for U.S. tech stocks.   © Reuters

TOKYO -- The news of billions of dollars of bets on U.S. technology companies by Masayoshi Son's SoftBank Group have shaken up not only the U.S. markets, but also individual Japanese investors who had recently piled into that corner of the market.

When a retail broker at a major securities company recently suggested buying shares in messaging app provider Slack Technologies ahead of its earnings announcement, the customer did the exact opposite by cashing out a foreign-stock mutual fund. "Even when I said it is a chance to buy low, he wouldn't listen," the broker said.

Swings in U.S. tech stocks "have a major psychological impact on retail investors here," said Makoto Yamada, head of equity trading at SMBC Nikko Securities.

Japanese retail traders had flocked back to the U.S. this year. Net inflows into foreign-stock mutual funds came to 940 billion yen ($8.85 billion) for the first seven months of 2020, compared with a net outflow of about 200 billion yen a year earlier, according to the Investment Trusts Association, Japan. This past July saw the debut of a number of big publicly offered funds consisting of American technology stocks.

Until recently, structured notes, or debt securities, linked to Nasdaq Composite Index components were popular among the affluent, and trading in individual stocks was brisk as well. Many traders would reinvest profits, creating a positive feedback loop.

But the steep drop in American tech stocks over the past few days -- after a swift rally into record territory from the depths of the coronavirus shock -- has stoked fears of a deeper correction following reports last week of large-scale options trading by SoftBank.

Over the past few months, the Japanese technology giant has snapped up massive quantities of call options, reportedly amassing $4 billion in unrealized profits.

The nominal value of calls traded on individual U.S. stocks -- such as Amazon.com and Facebook -- averaged a record $335 billion per day for the past two weeks, according to Goldman Sachs. Unusually, the surge was not accompanied by a similar rise in index call options.

Typically, when brokerages sell call options, they take offsetting long positions in the same stock to minimize the risk of losses if the price rises. These so-called delta hedges can lift share prices on their own but also risk accelerating any declines.

The Nasdaq index further surged 10% in August, with some technology companies rallying beyond what seems merited by their earnings outlook and other fundamentals. In this environment, Son's whale of a bet, coming to light alongside a sharp correction, was bound to make a big impression regardless of its actual significance.

SoftBank's call options represent a bullish bet. But many worry that stocks already look overvalued, leading to concern that the company could pull out if Son has a change of heart about the market.

And while SoftBank pales in terms of scale compared with such well-known Japanese whales as the Government Pension Investment Fund and the Bank of Japan, the technology conglomerate's use of leveraged bets makes it a formidable player in its own right.

Call options on American tech stocks have ballooned owing to not only big players like SoftBank, but also small traders like users of the popular Robinhood app. "The fluctuations may continue," a sales trader at Goldman Sachs Japan said.

Nikkei Stock Average put options at 19,000 have emerged as the top-selling instrument at eWarrant Japan Securities, which offers options trading to Japanese retail investors.

"That's preparing for a drop in the market," said Kodai Tada, head of the brokerage's investment information department. "Retail investors are leaning bearish."

The broker who tried fruitlessly to sell Slack shares put it this way: "If there's not a strong rebound in the U.S. market this week, the wait-and-see mood won't lift."

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