| Kaiser Watch June 26, 2024: What happened Friday at 11:32:21 ET? |
| Jim (0:00:00): Why did TSXV volume on Friday nearly double to over 200 million shares? |
On Friday June 21, 2024 at 11:32:21 ET somebody or something liquidated more than 160 positions in resource listings on the TSXV alone through Anonymous within a time window of about 10 seconds. Most people did not notice a surge in trading activity except those who happen to own or watch one of the companies involved in the selling. The TSXV usually posts a file by 4:30 pm PT that includes the day's volume, value traded, number of new highs and lows, and the number of traded stocks that closed up, down or unchanged. That file did not show up until Saturday morning and I was shocked to see that volume had jumped to 209 million on Friday compared to 124 million on Thursday and 83 million shares on Wednesday when US markets were closed for Juneteenth. I also noticed that new lows jumped to 61 companies, a level we have not seen since late September 2022. For the past decade new TSXV lows have ranged 10-20 daily while new highs are generally below 10 companies. Value traded which has been ranging $40-$60 million daily jumped to $77 million from $62 million the day before, an indication that much of the liquidation involved low priced stocks.
What really shocked me, however, was that the volume of TSXV resource listings jumped to 156 million shares from 85 million shares the day before which was 75% of total volume. LBMA gold had dropped $16 the night before but gold has been fluctuating a similar amount in both directions for some time so such a move cannot massively change market sentiment. I was curious if one or two cheap stocks went on a trading binge because I certainly did not notice in the KRO Slack channel postings a shift in positive or negative sentiment.
KRO is an information platform which features all resource companies listed on the TSX, TSXV, CSE and ASX. Every day I generate top 100 lists for each exchange for volume and value traded as well has percentage and absolute price gains or losses. When overall volume spikes these lists are useful to spot which companies are attracting high volume or traded value. Usually when we see a single day spike it is caused by a takeover bid, bankruptcy filing or exceptionally good news which attracts the algo trading machines. I was thus surprised to see that the biggest volume trader on the TSXV was Purepoint Uranium Corp which traded 2,352,000 shares to close unchanged at $0.03. Purepoint is a uranium junior whose last press release was issued on April 29 announcing that it was starting a drill program at its Turnor Lake project in the Athabasca Basin. My data feed only includes trading through the TSXV, not the alternative trading systems, so I checked Stockwatch and saw that 3,550,773 shares of Purepoint had traded when all the ATS are included. That means only 66% of the Purepoint volume went through the TSXV.
Stockwatch has a cool feature called Trade Workstation which allows you to retrieve all the individual trades for a day as well as a "house summary" for a single day or range of days that tabulates how much was bought and sold through each brokerage firm. "Anonymous" is a special feature the exchange allows which hides the identity of the buying or selling firm so that company executives cannot easily figure out which shareholder has given up on the company. I did a trade recall for Purepoint and was stunned to discover that Anonymous unleashed a flurry of trades at 11:32:21 ET that ended 9 seconds later at 11:32:40. I have assembled all the Purepoint trades as a graphic so everybody can see the trading pattern.
During this 10 second window Anonymous sold 2,317,000 shares of which 998,000 were sold through the CX2 and Omega ATS, mostly at the beginning, with 1,319,500 shares sold through the TSXV mainly towards the end. In most cases of all the stocks sold at 11:32:11 the initial selling took place through the alternative trading systems and only in the second half included trades through the TSXV itself. The ATS platforms were allowed decades ago to prevent the stock exchange, which had become a corporation, from enjoying a monopoly in trade execution for its listings. This was supposed to benefit investors but it does no such thing and anybody who claims otherwise is a blatant liar. The system is designed to force every buyer or seller to get the best available price for an order, but it violates the "first come first serve" principle. This is the common sense concept that when a trade takes place at a price, the orders that were placed first into the order book should be filled first. For example, if weeks ago you placed a bid for 100,000 shares of Purepoint at $0.025 when there were no other bids at that price, if somebody decides to sell 100,000 shares at $0.025, for example "hit the bid", you should be the first order filled. In the Purepoint Order Book graphic I have provided as an example you can see that there are 6,538,000 shares bid at $0.025 and 1,420,000 shares offered at $0.03. But note that in addition to the TSXV order book there are 8 ATS order books containing buy orders for 4,276,000 shares at $0.025. Your 100,000 shares in the TSXV order book may be first in line to get filled, but only if the seller's order is funneled through the TSXV.
The problem is that each of these order books have their own fee structure. Some pay the broker for the order, others such as the TSXV charge an extra fee for limit orders that hit the order book with a buy or sell price limit. When I trade a resource junior I always look at the market depth and design my buy or sell price limit to maximize getting most of my order filled in one shot. The TSXV penalizes such orders because it provides maximum satisfaction to investors and reduces the ability of traders to steal this satisfaction so as to line their own pockets. It much prefers investors to post open orders which the algo traders can study and exploit. When a brokerage firm submits your limit order for execution, its computer first does an analysis of the multi-platform order book and calculates which execution path minimizes the fees charged the brokerage firm. The best price principle has to be honored, but the execution of your order will weave a path through the ATS maze that has nothing to do with your interest because you will still be charged the same commission. The brokerage firm pockets the fee saving arising from the selling path. This system sacrifices the first come first principle because even though your 100,000 share order for Purepoint at $0.025 is sitting at the top of the 2,260,000 shares in the TSXV order book, your chance of getting a complete fill from the first 100,000 shares sold at $0.025 since you posted your bid competes with the 4,276,000 shares parked at $0.025 in the 8 other ATS platforms. Ordinary investors submitting passive orders to sell or buy (ie above or below the current bid-ask spread) through a discount brokerage firm cannot specify the order book. To park a bid in the Omega ATS requires a special relationship with the brokerage firm either as an employee or via a representative. This does not exist for retail investors. The entire system is designed to serve the interests of everybody but the retail investor.
There is another complication in order execution courtesy of something called an iceberg order which exists to make it difficult to assess the true depth of the market. An iceberg order is a large order entered into the book at a set price but its existence is invisible. For example, look at Friday's Purepoint trade history which is unusual in that multiple small 1,000 share trades took place simultaneously through Omega and CX2 with the buying done by either National Bank or Anonymous. What is curious is that National Bank ends up buying 1,000 shares at $.03 at the same instant Anonymous buys 1,000 shares at $0.025. All of Thursday's trading took place at $0.03 so I presume that was the Purepoint bid on Friday morning. This peculiar alternating price pattern is only possible if National Bank had an iceberg buy order at $0.03 which showed only a 1,000 share bid that kept being replenished the instant the visible part was filled. So we have the bizarre phenomenon of Purepoint simultaneously trading at $0.025 and $0.03 in small amounts because the seller through Anonymous has unleashed a sell order with a $0.025 limit. The only physical explanation for this is that algo machines were trading with each other. During the remaining 3.5 hours of the Friday trading session only 13 trades totaling 143,683 shares took place.
As an isolated event this is not very interesting because it looks like somebody dumped a position of 2,317,000 Purepoint shares to gross $60,970. And they chose to do it through Anonymous because the seller does not want management to know who gave up on the company. But this was not an isolated event.
I did a trade recall for the top 30 TSXV volume leaders on Friday and discovered that 15 of them underwent a similar selling binge by Anonymous all starting precisely at 11:32:21. I have provided a graphic which lists the top 30 TSXV volume leaders for Friday and tagged those companies which underwent selling by Anonymous at 11:32:21. One of my subscribers noticed that KRO Favorite Solitario Resources Corp which trades on the TSX had a similar but much smaller scale event take place at the same time. I learned that two KRO bottom-fish Endurance Gold Corp and FPX Nickel Corp which did not make the top 100 volume leader list underwent similar "Anonymous" sales that in the case of Endurance knocked the stock down to $0.10. On Saturday people were posting on social media that there had been a mini "flash crash" on the TSXV involving 60-80 companies attributed to a rogue algo program. This aroused my curiosity about how widespread this 11:32:21 liquidation event might be.
This week I used the KRO Search Engine to display all the TSXV resource listings which I walked through looking for a dangling price bar in the short term chart or a single day volume spike. That is how I discovered relatively illiquid juniors like Trailbreaker Resources Ltd which had closed at $0.46 on Thursday but dropped to $0.33 on Friday before bouncing back to close down $0.025 at $0.435. I have provided screen shots for the Endurance and Trailbreaker search result display to illustrate the chart anomaly.
By the time I had gone through the entire list of 1,157 TSXV resource listings I had confirmed 162 with trading that started in most cases at 11:32:21 ET though in some a little later but in most cases was finished within 10 seconds. This investigation involved using the Stockwatch Trade Workstation to do a Friday trade recall, which was a tedious process that took most of the day. However 95% of those stocks which met my visual cue exhibited Anonymous selling at 11:32:21 or thereabouts. In most cases the amounts sold were small compared to the ones that saw millions of shares sold below $0.10. I have heard that there was parallel activity in the OTC BB market for some of the stocks. I suspect that if one looked at the juniors listed on the TSX and the CSE the total number of companies involved exceeds 200 companies. I have provided a list of these companies and encourage company executives to examine the trading in their stock on Friday and start asking questions. If anybody discovers other juniors with the 11:32:21 Anonymous selling pattern, please send their names to me at [email protected].
I know the management of some companies such as Endurance which thinks it knows roughly who owns its stock has been fretting all year by Anonymous selling activity biased toward the downside. The identity of the seller remains a mystery. It is impossible for a human trader to have executed Friday's trades simultaneously. A lot of effort will have been spent to queue up an algo program plugged directly into the TSXV order execution system and unleashing the selling all at the same time. It was probably done on behalf of a "whale" whose overly diversified resource junior portfolio needed to be liquidated, a portfolio so large it doubled TSXV resource listing volume on Friday June 21, 2024. And it was unleashed all at once with the push of a start button, probably to prevent all the other algo traders lurking in the TSXV order books from realizing a massive liquidation event was underway and taking evasive action. In that regard it worked. Most industry people I talked to this week had no clue this took place on Friday. It is worrisome that somebody gave up on the resource juniors in such a big way but what truly frightens me is the evidence this liquidation event provides about what can be done with TSXV resource juniors using algo programs increasingly being adapted to AI generated strategies. |
Purepoint Uranium Corp (PTU-V)
Unrated Spec Value |
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| Turnor Lake |
Canada - Saskatchewan |
2-Target Drilling |
U |
Endurance Gold Corp (EDG-V)
Bottom-Fish Spec Value |
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| Reliance |
Canada - British Columbia |
3-Discovery Delineation |
Au |
Trailbreaker Resources Ltd (TBK-V)
Unrated Spec Value |
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| Liberty |
Canada - British Columbia |
2-Target Drilling |
Cu Mo |
Friday June 21, 2024 TSXV Volume Leaders |
Trade History for Purepoint on June 21, 2024 |
Example of Purepoint Order Book showing ATS platforms |
Examples of Friday's mini Flash Crashes - Endurance and Trailbreaker |
List of 162 TSXV resource listings Anonymous dumped at 11:32:11 ET on June 21, 2024 |
Trade History for Endurance Gold on June 21, 2024 |
| Jim (0:09:45): Do you think this was a fund liquidating a portfolio, such as a flow-through fund? |
When I first recognized the 11:32:21 ET liquidation event pattern my first suspicion was that it was one of the flow-through funds liquidating its portfolio early. Most flow-through funds provide financing during the last quarter of the year. In one case involving Marquest there is a fund liquidation deadline, usually the end of October, where fund holders can elect to receive their pro-rata share of the fund as either cash or stock. Last year we saw a lot of fund holders elect to receive cash, which means the fund manager has to dump that pro-rata share of stock by the deadline. Last year was a miserable year for Canadian resource juniors because of the widespread forest fires that shut down exploration in many areas, especially the critical James Bay region of Quebec where a massive "boots on the ground" prospecting campaign was supposed to look for lithium pegmatites similar to the CV5 pegmatite Patriot Battery Metals had delineated on its Corvette property. By H2 of 2023 the resource sector had collapsed into a deep funk, so flow-through fund investors elected to redeem their stake as cash. The Friday 11:32:21 selling, however, involving at least 162 resource juniors, included a large number of juniors with flagship projects outside of Canada and which would not have been inside a flow-through fund.
It is possible that Anonymous was selling for an institutional fund focused on the resource sector which has decided to give up on the resource sector, and in particular in the resource juniors which have lost their retail audience, face a hostile regulatory regime and a predatory financial establishment, are being squeezed out by resource nationalism and corruption in Global South countries such as Mexico, and in Global West nations face a hostile permitting blockade through First Nations or NIMBY lobbies encouraged by federal governments which do not perceive the existential threat democracy faces. However, there is no rhyme or reason to the mix of companies that were sold at 11:32:21. Some are very obscure companies that even I do not know anything about and some are financially challenged juniors. Furthermore, it is unlikely that a professional fund manager would have bought millions of shares in stock trading below $0.10 because their story has largely failed to deliver. The TSXV resource listings that made the top 30 volume leaders were probably bought at cheap prices which a professional fund manager would not have done. Furthermore, only 15,300 shares of Solitario were sold via the TSX at 11:32:21. A resource fund would not own such a small amount of Solitario and so much stock in weak juniors. The makeup of the liquidated portfolio suggests the owner was a wealthy individual who bought resource juniors more for entertainment than making money. It would not surprise if the liquidation event was done on behalf of a deceased person's estate. |
| Jim (0:12:00): Could this liquidation event have something to do with the capital gains tax change in Canada? |
On May 17, 2024 Canada's Prime Minister came up with the bright idea of making a capital gains tax grab targeting wealthier individuals. There was unusual trading activity on the TSX which appears to be related to the new capital gains tax regime in Canada which took effect on June 25. Friday June 21 was thus the last chance to make any adjustments. Prior to June 25 Canadian residents calculated their net capital gains from stock transactions and if the amount was positive, added 50% to their income where it would be taxed at the individual's marginal tax rate. This marginal tax rate is progressive, increasing with higher amounts of income. This is different from the United States where capital gains are taxed at specific rates based on whether it was long term or short term (held for less than a year). The higher a Canadian's income, the bigger a chunk of their capital gains he or she would lose to taxes. Under the new system the 50% number will remain the same for individuals on the first $250,000 capital gains, but any amount above that will require 67% to be taxed at the marginal rate. For your average retail investor this change is largely inconsequential, especially ones who speculate in resource juniors. It is interesting to note that shortly after the tax change announcement in May the uptrend Patriot Battery Metals had developed after a rough start for the year abruptly reversed and the stock last week briefly traded below $5. Part of that is due to the funk in the lithium and EV space, but it is also the case that PMET was a windfall score for many investors who bought below $1. Not all of them unloaded their entire position last year because it is a world class lithium discovery that will play an important role in future lithium supply. But, faced with the double whammy of a hostile EV sector drumbeat and capital gains beyond $250,000 suddenly shifting from 50% taxable as income to 67% taxable income, many of those original PMET investors have likely been selling their positions since mid May.
The change, however, is very important for corporations and trusts because after Friday all capital gains will be 67% taxable. In Canada there is something called the 21 year rule for trusts which requires that every 21 years after setting up a trust the assets of the trust are deemed to have undergone a disposition at market value, which generates a capital gain liability. In Canada the 21 year rule does not apply to alter ego and joint partner trusts. An alter ego trust can only be created for an individual aged 65 or older and is only for the benefit of that individual until that person's death, at which point a deemed disposition happens at market value, and the post tax proceeds are distributed to the named beneficiaries without going through probate. In a joint partner trust this only happens when the surviving spouse passes away. Since the announcement of the Canadian capital gains tax change trusts have been busy capturing capital gains so that only 50% gets taxed. This is important for trusts approaching the 21 year mark. Although senior equity markets remain near record highs, the potential for a crash after the US election in November is quite high given Trump's assertion that any election outcome not in his favor means the election was rigged.
It is possible that Friday's 11:32:21 selling activity involved a trust liquidating a resource portfolio that had a large overall implied capital gain, though with some of the stocks dumped on Friday that is hard to imagine. However, we may not be seeing everything that was liquidated which could include more senior equities that were in the money. Many of these resource junior stocks are dogs that probably represent losses for the owner. You would save those to offset future winners. However, if you are selling winners you still have to pay tax on 50% of the gains. So if you want to minimize your taxes due in April 2025 you would sell all your losers too. The fact that the selling started at 11:32:21 in so many stocks means that it was a single entity whose trustee chose to set up liquidation at the same time so that the market did not have a chance to get spooked. This was not an algo mistake, it was a planned liquidation most likely related to the capital gains change in Canada. A depressing alternative explanation is that some wealthy investor gave up on the future of the Canadian resource junior eco-system. |
Patriot Battery Metals Corp (PMET-T)
Favorite
Fair Spec Value |
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| Corvette |
Canada - Quebec |
4-Infill & Metallurgy |
Li |
| Jim (0:16:03): Do you think this trading could have been caused by an out of control rogue algo program? |
Social media speculated on Saturday morning that an algo program, possibly driven by some sort of AI generated strategy, spun out of control and caused these mini-flash crashes in 160 plus resource junior stocks. During the early years of electronic order execution there was a problem of "fat finger" trades where a human trader accidentally entered a market sell order that would clean out all the bids in the order book. The large scale of the 11:32:21 liquidation event would have take a lot of planning to set up, and the pushing the start button would not have been a human fat finger event.
Over the weekend some people speculated that if it was a rogue algo program that "unintentionally" sold a portfolio of stocks the account did not actually own, for example, a naked short sale into the market involving more than 160 resource juniors, many trading below a dime, and that there should be a short covering scramble on Monday. On Monday trading volumes were back to normal and have declined further as the week progressed. If this trade was indeed an accident that sold non-existent positions the TSXV would likely have canceled the trades. It is also unlikely that that an AI assisted algo program deliberately sold short these positions. None of these stocks is eligible for margin and a brokerage firm can only lend shares if they are in a margin account or in a cash account that is overdue. Trade settlement is now the next day and nobody gets to buy stock anymore with the promise to mail a check or wire money. The simplest explanation for Friday's mass liquidation event at 11:32:11 ET is that an individual with a very large portfolio of random resource juniors decided to dump it and got a brokerage firm to set it up before anybody had a chance to sniff out a whale with a need or desire to liquidate.
What I do find troublesome is how easy it was for this mass liquidation event to be pulled off. If this can be set up for a real portfolio of juniors, why not a theoretical portfolio? Suppose senior equity markets begin to crack. Canada's algo traders could be positioned to crush the markets of all the resource junior listings. Thanks to the ATS platforms the down-tick rule for short-selling has been eliminated and cannot be reinstated. The reason is that with orders flowing through multiple order execution platforms it is impossible to have an absolute time stamp that establishes whether the last executed trade was higher or lower than the last different trade. When trading accounts sell naked shorts on a down-tick they simply need to "intend" to borrow the stock for next day's settlement. But if they cover the short position by the end of the day that borrowing requirement evaporates. In the case of a market crash there will be no incoming capital to buy resource juniors at "bargain" prices so the algo traders will end up with naked short positions carrying over to the next day. But dealing with that will be the least of the financial establishment's problems and so this problem will be left to resolve itself in the weeks after the crash.
The lesson we should draw from the Friday mass liquidation event is how easy it is for computer based trading strategies to be executed in the resource junior market. The biggest threat to the resource junior eco-system is the asymmetry between retail investors and these professional computer-assisted traders. A retail investor has to think about a junior's potential outcome and what the latest results news release means. The algo traders simply need to notice that there is buying activity by retail investors. Usually it is the promoters, brokers and hidden insiders who fill the boots of retail investors but now they face formidable competition from algo traders backed by bank capital who can sell non-existent stock into the bids, and when the incoming retail buy orders dry up, lean into the order book just as Anonymous did on Friday, this time selling more paper the account does not own until the longs despair and unwind their positions by the end of the day, enabling the algo traders to cover their naked shorts without ever borrowing stock. This giant vampire squid backed by the Canadian financial establishment harvests incoming risk capital and prevents the market from functioning as a price discovery mechanism for resource junior projects. The Canadian resource junior eco-system is dead by the end of the decade unless this asymmetry on so money fronts is changed. |
| Disclosure: JK owns shares of Endurance Gold; Patriot Battery is a Fair Spec Value rated Favorite; Endurance is Bottom-Fish spec value rated |
