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Today, there are about 639 million shares of SpaceX available in the market, which SpaceX sold in its initial public offering in June. Tomorrow, there will be about 1.55 billion shares available, as a portion of the shares that were locked up after the IPO are unlocked. That’s much more. SpaceX should be cheaper tomorrow than it is today, because of supply and demand. This is not investment advice. It’s not even true! If something should be cheaper tomorrow than it is today, what you should do is sell it today (at a high price) and buy it back tomorrow (cheaper). This has the effect of lowering the price today and raising the price tomorrow. You should keep doing this until it is no longer true, until the price today equals the expected price tomorrow. This is called “arbitrage.”

We have talked about this before. I have sort of argued that this trade is the mirror index of the index rebalancing trade that big hedge funds do. In index rebalancing, there is predictable large buying demand from index funds on a fixed date, which will predictably push up the price of the stock; hedge funds buy stock ahead of the fixed date to sell into the index-fund demand, smoothing out price moves. Similarly, in lockup releases, there is predictable supply from locked-up early shareholders on a fixed date, which will predictably push down the price of the stock; hedge funds short stock ahead of the lockup release date to buy from the lockup-release supply, smoothing out price moves. The hedge funds do a trade that could be described as arbitrage, or even I suppose as “front-running” the lockup release, but that could also be described as liquidity provision: They match up today’s SpaceX buyers with tomorrow’s lockup-release sellers.

This is not quite a thing, in the way that index rebalancing is a thing. You do not hear a lot about multistrategy hedge funds having lockup-release pods that make billions of dollars in good months, like index-rebalancing pods do, but partly that is a matter of scale. Index funds are really big and their rebalances involve many billions of dollars of stock. Most companies are relatively small when they go public, and their lockup releases aren’t that exciting. SpaceX’s is. Bloomberg’s Bailey Lipschultz reports:

Investors hanging onto SpaceX shares after a plunge below their IPO price are bracing for the next potential hit, when $101 billion worth of stock becomes available for trading on Thursday. …

“We’ve never seen anything like it, we’ve never seen anything of this scale, we’ve never seen a lock-up being phased in this way,” said Peter Singlehurst, head of the private companies team at Baillie Gifford, which first invested in Elon Musk’s company in 2018. “We’re in uncharted waters.”

The lifting of restrictions on up to 911.5 million shares comes as volatility whips the shares after its first quarterly earnings report triggered a 13% slide to reverse a two-day surge that added in excess of $250 billion to its market capitalization to start the week. …

Ending restrictions on some insiders will more than double the number of shares available, to as many as 1.55 billion shares from about 639 million shares now, according to the IPO prospectus. …

The highly-anticipated unlocking paired with a lofty valuation has drawn a swarm of short-selling investors with 35% of shares currently available for trading are being sold short, according to data compiled by S3 Partners through Tuesday’s close.

Really the expected price of SpaceX stock tomorrow, after the first phase of the lockup is released, should equal the closing price of the stock today: This is a well-anticipated event, and all of those short sellers have essentially been selling tomorrow’s shares today. That said, the variance around tomorrow’s price is high:

“Many investors are simply unwilling to buy SpaceX shares in the interim based on fundamentals and the lock-up overhang that’s going to exist until December,” said David Wagner, portfolio manager at Aptus Capital Advisors. “Bluntly put, we are in that same exact boat.” ...

“There’s probably a reasonably good chance that this will be the biggest single increase in the supply of shares for a single company in a single day ever,” said Baillie Gifford’s Singlehurst. “And so what happens on that day? I don’t know.”

One thing to think might be that, in an increasingly efficient market, this problem will just get solved. SpaceX has a staggered series of lockup releases; the one in December is even bigger than tomorrow’s. Anthropic and OpenAI are expected to go public soonish too, and will probably have basically similar dynamics, with gigantic periodic lockup releases.^[1] Right now, it is hard to know what to expect from a gigantic lockup release. But smart people are working on it; there is money to be made by arbitraging between the locked-up and unlocked states of the world. It’s a harder problem than the index-rebalancing trade: Index demand is fairly mechanical, but you need some theory of mind of SpaceX insiders to anticipate how much stock they’ll actually sell when they can.^[2] But it’s a lucrative problem, tomorrow is a data point, and eventually people might figure it out. Perhaps by the time OpenAI’s lockup expires, no investors will be going around saying “we are unwilling to buy the stock because of the lockup overhang.” Perhaps that problem will be solved.

By the way, as I once wrote, in some ways the nicest solution would be to combine the two trades: Set the lockup release date to be the same day that the company is added to the index, so that index funds are buying right as locked-up insiders are selling.^[3] You don’t need arbitrageurs to provide (as much) liquidity either way; you just have the predictable supply sell into the predictable demand. I do not expect that to happen.

How much money was Situational Awareness, Leopold Aschenbrenner’s artificial intelligence-focused hedge fund, running at its peak? I don’t know! There are reports suggesting that it had perhaps $45 billion of assets under management at its peak in early July. And there are reports suggesting that at least some of its book was levered four or five times, meaning that it had $4 of long and short positions for every $1 of equity. If you just naively multiplied those two numbers together you would get a number that is bigger than $100 billion.^[4]

And then its AI bets went wrong in July, coming to a head last week when its banks arranged a fire sale of most of its remaining public equity book to Citadel. There are reports suggesting that this trade was for something like $16 billion or $20 billion of assets. And now Situational Awareness is left with something like $8 billion or $10 billion of remaining assets, unlevered, many of them private.

There are huge error bars around all of these numbers, but I just want to make the simple naive point that the number in the first paragraph is quite a bit bigger than the number in the second paragraph. The portfolio that Citadel acquired last week, combined with the portfolio that Situational Awareness was left with, seems to have been slimmed down significantly from the portfolio that Situational Awareness was managing at its peak.

You could imagine a story of Situational Awareness that is like:

1. It had some AI bets, which went well.
2. Then they started going poorly for exogenous reasons.
3. Then one day its banks sent it a margin call, which it could not meet, leading to a fire sale to Citadel to clear out its debt.

But a slightly different story would be:

1. It had some AI bets, which went well.
2. Then they started going poorly for exogenous reasons.
3. Its banks sent it daily margin calls, asking for more money each time its stocks went down.
4. Then Situational Awareness started selling billions of dollars of stock to raise cash to meet the margin calls.
5. Which pushed its positions down some more.
6. Leading to more margin calls.
7. Eventually this drip-drip approach seemed bad and the banks and Situational Awareness got together to end it, by clearing the portfolio out to Citadel.

In this story, Situational Awareness was part of the cause of its AI positions moving against it over the past few weeks. It was selling stock to meet margin calls, and because (1) it held huge chunks of many of its stocks and (2) a lot of other investors were paying attention to its trading, its sales drove down the prices of its positions, leading to more margin calls, leading to more sales. It was not closed out to Citadel overnight last week; it was closed out in the classic way, gradually and then suddenly.

That story must be at least partly true. The assets peaked in early July and then sold off; Bloomberg reports that “when the tech stock rally began to falter, the fund’s lenders became nervous about highly-leveraged losses, forcing Aschenbrenner to start liquidating his portfolio to meet their margin calls.” The Wall Street Journal reports that “when AI stocks wobbled in recent weeks, Situational faced margin calls from its lenders,” “dumped stocks to raise cash before seeking out a buyer who could take down the bulk of its portfolio in one fell swoop” and “met its margin calls as recently as Wednesday.” And Aschenbrenner’s letter to investors last week said:

The portfolio experienced a significant drawdown over the course of July, which was exacerbated by extreme moves in core positions over the past week. …

As these moves proceeded, we started to see increasingly adverse trading in names publicly associated with us. These dynamics are essentially similar to a bank run: vulnerability begetting vulnerability. We worked to keep the portfolio within our risk parameters, but gradually this became more difficult as positions rapidly moved against us and market liquidity dried up.

On Wednesday night/Thursday morning, we took decisive action to protect LP capital. We traded a portion of our public portfolio in a block transaction to remove all leverage from the fund.

Like: “We worked to keep the portfolio within our risk parameters” by selling, “but gradually this became more difficult as positions rapidly moved against us” because of all the selling, so “we took decisive action” by doing the block trade. Vulnerability begetting vulnerability.

Maybe this is all obvious? Or maybe I’m overstating it and there was no material forced selling until last Wednesday; it is hard to be sure about the size and timing of all of this. But there is a popular narrative that Situational Awareness was somehow assassinated, that predatory short-sellers or a Citadel rate hike call caused its positions to collapse overnight, and I am skeptical. Bloomberg’s Yiqin Shen reports:

The losses that forced hedge fund Situational Awareness to sell stocks at deep discounts appear to be the result of highly concentrated positions in crowded trades, rather than a concerted effort by short-sellers, according to the founder of a company that analyzes short positioning data.

Instead of any clear pattern of “predatory trading,” S3 Partners’ data show there was no significant increase in short sales across the fund’s top holdings, according to the firm’s founder Bob Sloan. Rather, the data show that while short sellers increased bearish bets on some of the fund’s holdings, half of the top 10 saw short interest flat or declining.

The simple story is not that shadowy predators were selling Situational Awareness’s stocks to drive it out of business; it’s that Situational Awareness was selling Situational Awareness’s stocks to drive it out of business. That’s life running a risky directional book at 4x leverage!

Meanwhile, Bloomberg’s Hema Parmar and Nishant Kumar report that “Whale Rock Capital Management’s flagship hedge fund is one of the biggest losers in last month’s AI selloff, with a 21.7% drop in July erasing about half of its gains for the year.” But they also also report that;

Citadel’s flagship fund surged 5.9% in July as the firm became one of the few winners from the turmoil at artificial-intelligence hedge fund Situational Awareness.

The results show Citadel’s rapid deal to buy most of Situational Awareness’s public stocks at a discount brought almost immediate gains: the Wellington fund at Ken Griffin’s firm had only been up 0.45% with a week to go for the month of July.

The transaction helped boost year-to-date gains at Citadel to 12%, according to a person familiar with the matter, who asked not to be identified discussing confidential matters.

Once the forced selling stops, the stocks go up.

One of the main goals of most gambling regulators is to minimize or at least manage the negative social consequences of gambling addiction. Regulated sportsbooks in the US tend to list problem-gambling hotlines on their websites, and sportsbooks that too aggressively exploit gambling addicts sometimes get in trouble. Most US states limit legal gambling to customers who are at least 21 years old, on the theory that teenagers are more likely to be susceptible to addiction. I don’t want to overstate any of this, and it is possible to be quite cynical about all of it. A lot of casinos and sportsbooks (and state lotteries for that matter) do quite obviously make a lot of their money from problem gamblers; you can’t realistically expect widespread legal regulated gambling to be only fun and harmless. Still, my sense is that most US state gaming regulators try. And of course some states don’t allow sports betting at all, which is another way to limit the harms.

But in the last two years somehow the US Commodity Futures Trading Commission has also become a gambling regulator, and has in fact asserted that it is the only legitimate gambling regulator in the US^[5]: Because it regulates sports gambling on prediction markets like Kalshi, no state can do anything to limit or regulate that sports gambling. This is a weird role for the CFTC; historically, US financial markets regulators have not promoted sports gambling. But the CFTC has taken to it enthusiastically, and we talked in June about its proposed rules to regulate sports betting.

The basic point about those rules, though, is that they are market integrity rules. The CFTC would like to make sure that markets for wheat or gold or Treasury futures, or for the over/under in the Knicks game, produce legitimate prices and are hard to manipulate. That is the traditional job of a markets regulator.

The CFTC doesn’t care about gambling addiction, though. Its 468-page proposed rulemaking about sports gambling is concerned with “the factors that the Commission would apply in determining whether [sports bets] are contrary to the public interest.”^[6] But gambling addiction gets almost no mention in the proposal. On page 202, the CFTC does acknowledge that it is promoting a vast expansion in federal sports gambling, and that, “with this possible increase in the number of event contracts, a related public interest issue should be considered”:

Some prediction market trading characteristics (such as outcomes occurring at unpredictable intervals, perception of skill-based decision making, near miss experiences, and potential for loss chasing behavior) are generally associated with addictive potential. …

These factors can lead to financial harm as users accumulate losses through high frequency trading, allocate disproportionate resources to trading activity, and have trouble disengaging voluntarily. Protective measures, such as position limits, cooling off periods, notification restrictions, or self-exclusion mechanisms might preserve legitimate market functions while mitigating harm to retail traders.

But there are no concrete proposals to extend these normal gambling protections to federally regulated sports bets. And the one nearly universal protection that US state gaming regulators use — banning teenagers from gambling — is not even considered. If you’re 18 and you want to bet on sports on Kalshi, that’s not the CFTC’s concern; it is completely incurious about whether letting 18-year-olds bet on sports on their phones is in the public interest.

This is very obvious and normal if you think about the CFTC as a market integrity regulator. It is odd if you think about the CFTC as a gaming regulator. It is odd for the CFTC to be a gaming regulator. But here we are.

Anyway Blooomberg’s Erik Larson reported on Friday:

New York sued Kalshi Inc.’s trading subsidiary for allegedly running an illegal, unlicensed gambling operation in the state, marking another legal hurdle for an industry that has won support from the Trump administration.

The suit, filed Friday in state court in Manhattan, alleges that Kalshi’s prediction market exposes state residents – including those under the legal gambling age of 21 – to “serious personal and financial risk,” New York Attorney General Letitia James said in a statement. …

“Kalshi has chosen to ignore New York’s gaming laws, which exist to protect consumers, prevent problematic gambling, deliver funding for critical public services, and ensure that every company plays by the same rules,” New York Governor Kathy Hochul said in the statement. ...

Kalshi called the New York lawsuit “sad” political theater.

“States can’t just shut down a federally licensed exchange,” Kalshi spokeswoman Elisabeth Diana said in a statement. “This would also hurt New Yorkers, who would be driven offshore.”

Here is New York’s press release. Just a weird state of affairs we are in, in which federally regulated sportsbooks can get around state consumer-protection regulation, but there is no federal consumer-protection regulation for sportsbooks.

Here is a story that you could have told — and that I have told — about Robinhood Markets Inc.:

1. Robinhood is a brokerage platform that makes it fun, easy and commission-free to trade stocks or options from your phone.
2. This got a lot of young people hooked on frenetically trading stocks on their phones.
3. That is, relative to some baseline, bad: Frenetically trading stocks on your phone as a hobby is probably worse, for most people, than buying and holding index funds.
4. It is, however, relative to some other baseline, good: Frenetically trading stocks on your phone as a hobby is probably better, for most people, than some other sources of financial dopamine. Stock trading is an essentially positive-sum game; even if you are investing in some dumb companies, you are getting exposure to broad secular growth in the stock market. Putting money into stocks for fun is better for you, financially, than spending that money on fancy dinners or beer or movies or, heaven forbid, sports gambling.
5. Eventually people grow up, and if you got them hooked on stock investing with confetti and meme stocks, maybe they will stick around for low-cost index funds and estate planning.
6. Perhaps, as I have put it, “day trading meme-stock options is a gateway drug for sensible retirement investing”: Robinhood draws customers in with risky fun, but they will ultimately graduate to positive-expected-value investing.

Here is an alternative, worse story:

1. Robinhood is a brokerage platform that makes it fun, easy and commission-free to trade stocks or options from your phone.
2. Robinhood needs to constantly find ways to dial up the dopamine hit of trading on your phone, so that it can keep growing.
3. Through an absolutely bizarre twist of fate, Robinhood can now let its customers do sports gambling from their phones, as part of its brokerage app.
4. Sports gambling is not a positive-sum game, not a way to save for retirement, etc.
5. But it’s a good business for Robinhood: Sports are more fun than stocks, sports gambling is addictive and exciting, and people will spend lots of money on it.
6. Perhaps Robinhood’s free stock trading is a gateway drug for sports gambling: Robinhood draws customers in with risky fun, and then they keep graduating to riskier fun.

Which story is true? I mean, both, but the Information reported last week:

Robinhood’s prediction markets revenue surged more than tenfold year over year in the second quarter to $156 million, the company reported last week, as part of its second-quarter earnings update. Prediction markets accounted for 20% of Robinhood’s trading revenue in the quarter, eclipsing both stock and crypto revenue for the first time and becoming its second-largest trading business after options.

That’s a significant change in the company’s revenue mix driven by Robinhood’s less than two-year-old prediction business. It also highlights how speculators have shifted their attention, and their trading activity, from financial markets to real-world events via prediction markets. …

“The people on Robinhood love gambling, and [the] prediction market is right up their alley,” said Dan Dolev, equity research analyst at Mizuho Securities. “It’s the perfect replacement for crypto because it produces a faster reward system in your brain. You don’t have to wait.” …

Robinhood’s second-quarter surge came during the World Cup, an event that takes place once every four years.

That made June and July volumes “abnormally strong,” according to a research note on Robinhood by Ed Engel, an equity research analyst at Compass Point. Still, U.S. football season is coming up this fall, he noted, which should provide a fresh boost.

Ah yes, football season, traditionally a lucrative time for stock brokerages. Because that’s when people like to bet on football. In their brokerage accounts.

Wall Street Investment Bankers’ Bonuses to Climb as Deals Surge. Trump administration refunds $100bn in ‘liberation day’ tariffs. US Keeps Debt-Sale Guidance Steady, Deepening Bill Reliance. Blackstone Has Pitched Mega Debt Package for Anthropic Chip Deal. Banks to offload $15bn of debt for Anthropic data centre backed by Google. SpaceX’s AI Splurge Puts a Damper on First Earnings After IPO. China courts global investors with bond market tweaks. Wall Street Is Deepening Its Crypto Grip and Rewiring the Market. Glencore Takes Provision on Exposure to Trader Radiant World. OpenAI to Pay $3.2 Million to Settle Claims It Discriminated Against U.S. Workers. US bans exports of various used critical minerals. Some 64% of Young Men Day Trading Stocks Feel Like Failures.

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