If I hear "may we live in interesting times" from one more person...
For investors involved with Google [GOOG], today was indeed memorable. Like many tech bellwethers, Google was slammed in Monday's carnage. Today, in the uber relief rally, Google shares were humming along and regaining much of the losses from Monday. That is, until the closing bell.
Volatility, thy name is Google
One moment Google appears to be trading comfortably above $400 per share, and then, in the final minutes of the day we saw prints as low as $212.63 and as high $483.63; with the closing price as $341.
HUH? Excuse me?
Within seconds of the closing print, my head trader called my office to explain what transpired. He had warned us the day before that with the quarter end, the liquidity crisis and the historic volatility we should expect quite a few odd trades particularly on the opens and closes. While I recall the warning, I certainly didn't expect a 16% swing in a matter of minutes!
Why the closing price matters
Within moments of the closing price, it was clear something was amiss. In after hours trading, Google was trading comfortably above $400 [at $405 or so when I first took a gander]. So that might lead you to ask, so what was the big deal?
Well, as money managers know full well, the closing price matters, PARTICULARLY the closing price at quarter end. Most funds report results in some fashion on a monthly basis, and quarterly filings are required of all registered funds. This was both a month end AND the end of Q3. And this was GOOG, a stock that just about anyone involved in technology investing has at least some exposure to.
Had funds been forced to accept the closing price of $341 today, a number of issues would've been at play:
- Management fees -- Funds that charge management fees [i.e., almost all of them] generally take their fees on the 1st day of every quarter. So if you had a large position in Google, it was possible that the $341 print could've cost your fund a substantial amount of cash flow. For example, let's say you're running a $1B hedge fund that charges a 2% annual management fee. You are long 125,000 shares [roughly a 5% long position]. The difference between the legitimate closing price ($400.52) and the reported closing price ($341) or roughly $60 per share equates to a difference in ending equity of $7.5mm. The quarterly allocation of a 2% management fee (i.e., 0.5%) would be $37,500. Might not seem like much, but $37,500 in lost cash flow is meaningful for any business.
- Reported returns -- Month- and quarter-end returns would've been skewed. In the same example (125,000 share long of GOOG), this would've cost a fund as much as 75 basis points of reported returns. That's a big number, particularly for a volatile month where the majority of funds likely reported losses anyway.
- Skewed basis for capital inflows -- Depending on whether a fund was due for capital inflows at the start of the month, this would serve to unfairly skew the cost bases for existing clients if you initiated a buying program for the new capital at the October 1st stock price.
- Skewed basis for redemptions -- The inverse of the above. Investors taking money out as of September 1st would've had their returns understated.
Luckily, all of this turned out to be in error. Our trader sent me the following notification after this whole debacle unfolded:
Pursuant to Rule 11890(b) NASDAQ, on its own motion, has determined to cancel all trades in security Google Inc Cl - A "GOOG" at or above $425.29 and at or below $400.52 that were executed in NASDAQ between 15:57:00 and 16:02:00 ET. In addition, NASDAQ will be adjusting the NASDAQ Official Closing Cross (NOCP) and all trades executed in the cross to $400.52. This decision cannot be appealed. MarketWatch has coordinated this decision to break trades with other UTP Exchanges. NASDAQ will be canceling trades on the participant’s behalf.
Interesting times indeed.
Disclaimer: At the time of writing, the author and/or the firms affiliated with the author maintained a long equity position in Google [GOOG]. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.