Ronin Capital was not a Bear Stearns Moment $QLD $QID $VIX

March 22, 2020, 11:00 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The collapse of Ronin Capital struck fear into the market late in the day on Friday, and everyone worried if this was another Bear Stearns moment; admittedly, I was concerned about the exact same thing.  Most of our subscribers know that some of the biggest hedge funds read the research from Stock Traders Daily regularly.  Two Sigma, Citadel, Blackrock, inVictus, are just a few of these, so I know who most of the big players are.

However, I had no idea who Ronin Capital was, and I do not know many who did.  They were under the radar in many respects, while still being relevant.  They were relevant because they held a significant amount of assets, but they were also highly leveraged, so a material shift in any concentrated position could have wiped out their capital.

This is exactly what happened on Friday, and it seems to be directly related to positions they held in the VIX (INDEXCBOE: VIX).  Stock Traders Daily issued a short call on the VIX early in the day on Thursday, and our short position was up significantly on Friday.  This means that the VIX itself declined, and that seemed to trigger the failure at Ronin.

The market itself does not normally react so aggressively to conditions like this, but it appears that Ronin Capital also held a large stake in oil futures.  When the CME required them to unwind their positions they had to sell off oil as well.  We can see this by looking at oil prices at the time of closing at the CME.  Oil prices tanked in the final few minutes of trading at the CME, and then rebounded sharply before the close of the NYSE.

The sharp decline in oil was noticed by Wall Street.  Oil declined by about 10% in 30 minutes as the CME came to a close on Friday.  Although Ronin Capital itself may fly under the radar in many respects, they seem to have caused a domino effect as well.

Reasonably, the unwinding of a moderate position in oil would not normally cause the melt down of magnitude witnessed on Friday, but traders in oil react to price movements and many of the big players in the space were most likely aware of what was happening when it was happening.  In other words, buyers of oil were not willing to buy when they knew that Ronin Capital had to sell at any cost, and the floor was ripped out from under prices until the CME closed.

When the stock market saw oil collapse so violently it reacted too, and then we found out why, and that made it worse.  This is where the Bear Stearns moment played a role on Friday.  Most did not know who Ronin Capital was because their portfolio is traded on behalf of the owners of the firm only, but not knowing is detrimental when the market is crashing like it is now.

Without knowing who Ronin Capital was, but knowing that oil had just collapsed violently and that it actually could be another Bear Stearns moment, there was an absolute lack of buying interest in the stock market ahead of a weekend where coronavirus cases were sure to increase.

Buyers stepped away because they were afraid this could be another Bear Stearns moment, but it is not.  This trading firm was overexposed, they did not manage risk properly, and they were shuttered.  The concentrated position they held seemed to be VIX, and the timing of our short position in the VIX coincided with their collapse.

Interestingly, VIX spiked at the end of trading on the CME, and rightfully so given the conditions, but by the end of the day on Friday, even though the market had cratered from its highs, VIX was still down by more than 8%.  The action in the VIX is telling us that the declines in the market on Friday were not the same as the declines from prior days.

Still, technically the market broke key levels of support and that is most important because price matters most.

The discussion above about Ronin Capital concludes with the realization that this is not a Bear Stearns moment and institutional investors are likely to recognize the same thing, but technical support levels did break and unless markets reverse higher promptly additional declines are likely.  A realization that this is not a Bear Stearns moment does not imply higher market levels.  That won’t happen unless the S&P 500 moves back above (data for subscribers only).

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