Over the past 6 months, much attention has been focused on broker/dealer trading in ETFs, and more specifically, on the SPDR S&P 500 ETF, better known as SPY, which in the absence of material cash volume in intrinsic names, has become the de facto primary way to express a bullish and, to a much smaller degree, bearish bias on stocks. Previous observations by Zero Hedge and elsewhere have demonstrated odd accumulation behavior by major broker-dealers which have been speculated to use precisely this ETF, in order to "push" the market in one direction or another. Having done some micro-level research previously, we decided to analyse SPY patterns from a macro stand point. After compiling SPY holder data for the just completed Q4 2009 quarter, we have observed some very curious trends in SPY accumulation. To wit: in Q4, the 5 major market players saw a dramatic increase in their SPY $ notional holdings: specifically JP Morgan (combining both Asset Management and Private Wealth) jumped by 222%, Goldman Sachs saw a 45% increase, Merrill Lynch SPY holdings increased by 207%, and those of Deutsche Bank: by 256%. During this time Morgan Stanley was relatively flat, while probably the biggest surprise was Credit Suisse, whose holdings dropped by 48%, or nearly 24 million SPY shares, to 26 million in Q4. Keep in mind Credit Suisse had a record 2009 holding of 109 million SPY shares on June 30, 2009: it appears Credit Suisse ETF desk has decided to aggressively offload as many SPY shares as it possible can beginning in Q3, 2009. Altogether, we observe a decidedly positive correlation between B/D SPY holdings and the performance of the broader market.
Taking into account these moves, the top holders of SPY are now as follows:
At this point we need to caveat these findings with some observations. When it comes to SPY positions, it has long been a prevailing assumption that SPY holdings are merely a hedging instrument to underlying holdings in individual names, whereby the risk associated with a basket of S&P stocks is offset by shorting the SPY. Alternatively, shorting unique stocks can be hedge by going long the SPY. While we have information that over the past 2 quarters this has no longer been the norm, a question arises if by this major jump in SPY holdings for the bulk of the broker-dealers, have they in essence gotten short underlying names? And a further follow through, is whether these holdings are simply for the banks prop accounts or are these positions simply flow offsets as equity traders at the biggest B/D's hedge their client exposure risk? At this point we can not answer all of these questions definitively, although we are gathering sufficient information to provide much more color over the next few weeks. Until then we can only share factual observations, and let readers derive their own conclusions.
So on to the observations.
First, we should note that of the top 10 holders, one several names actively shift and rotate in and out of SPY exposure. Some names such as BMO, RBC and Bridgewater tend to have a flat SPY holding, which barely fluctuates over time. As such we focused on the other, "usual" suspects: Morgan Stanley, Goldman Sachs, JPM (both Asset Management and Private Banking), Credit Suisse, Merrill and Deutsche. The trend among the holdings of these key players is one of major accumulation, with one notable exception: Credit Suisse. The Swiss Bank has been massively dumping SPY holdings since Q2 2009, after having spent nearly 4 years to build up a position that at its peak was almost as big as the other key players combined. Yet what is even more obvious, is that the core 5 players, absent for Credit Suisse, are now back at record all time ($ notional) holdings in SPY at just under $23 billion. This compares to a mere $14 billion in the quarter before, and $10.3 billion in Q2 2009. Absent all possible complexities, it appears that the five major banks now clearly use SPY to track the broader market.
We currently have no explanation for Credit Suisse's very aberrant behavior in light of this major accumulation spree by all of its other peers.
Looking at individual firms, we notice similar patterns of trading activity.
Starting with Morgan Stanley, the firm which has recently had its fair share of quant problems, we can see just why MS may have decided to take some time off from being the dominant player in the SPY market (its Q1-Q3 SPY holdings of over $15 billion are a B/D record). While this chart is not very unique, one glaring observation is the dramatic drop in SPY holdings in Q3 and Q4 of 2007, only to see its holding rebound with a vengeance in Q1 2008. Was the August 2007 quant melt down responsible for Morgan Stanley's departure from the SPY market at the time? This is another interesting topic which we shall pursue. If the answer is yes, it would appear that quants have a much greater propensity to dabble in SPY than expected, which also would imply a much larger prop exposure in the ETF (as opposed to simply flow) by Broker Dealers.
Next, we look at Goldman's SPY holdings. Sure enough, the firm that in Q4 became the second largest holder of SPY after MS, ramped up its ETF holdings substantially, increasing its share holdings by 37% (or 45% in terms of $ notional). Goldman's holdings are now second highest only to its Q4 2007 exposure, when the market was at its peak. Goldman's SPY holding mimic the broader market quite well, as it is now only 22% off its all time high position.
Yet no bank shares JP Morgan's enthusiasm for the SPY. The chart below demonstrates the SPY holdings of its Asset Management and Private Banking divisions. The first saw its SPY holdings surge by 585%, while Private Banking increased by a very admirable 84%. We hope this answers some questions about JPM and whether or not the firm eliminates and recycles its SPY holdings at the end of any given trading day. JPM's combined SPY holdings are now higher than at any time ever in the past, at just over $6.6 billion in notional. We will keep an eye out on JPM Indications of Interest to correlate with which days JP Morgan accumulates the most SPY shares. At this point it is relatively clear that while JPM may be transacting on a flow basis, it is certainly accumulating a substantial amount as a prop trader.
Lastly, we need to highlight the biggest outlier: Credit Suisse. As noted previously, while everyone else has been lifting every SPY offer imaginable, CS has been dumping. Whether the share transfer has been merely a selling by CS to other broker dealers is unknown. What is known is that after many years of accumulating SPY, the Swiss bank is now allergic to this most valuable ETF.
We are currently compiling a secondary data set to go with the SPY, focusing on IWM, and other key ETFs, as well as offset activity by intrinsic names. Once all the results have been regressed, we will provide some additional observations on this most critical of ETFs for the current market.