What Were Institutions Up To With AMD?

Summary

• "Prior to" investment banks’ downgrade announcements, AMD's short volume and option volume increased sharply.
• AMD's stock prices dropped 13% amid the downgrades.
• Ironically, Goldman Sachs and Morgan Stanley increased their AMD holding significantly "after" they downgraded AMD's stock.
• Would you figure that?

By K C Ma, Matthew Sweeney, and Zachary Gunn

Advanced Micro Devices' (NASDAQ: AMD) share prices have been long known to be affected by investment banks' analyst recommendations. In this article, we examined short sale and option trading activities surrounding the releases of institutions' downgrades on AMD. The investment banks in this study include Goldman Sachs, Morgan Stanley, Barclays, and Susquehanna whose analyst reports have been capable of exerting market-moving impacts. Also considered is the recent infamous “CTS report” for obvious reason.

In order to isolate the market impact, we selected the downgrade reports only if there were no major ER events and no major analysts’ reports one month prior. In Table 1, the five downgrade reports were identified for the five institutions in question. Since AMD is the stock “in interest,” the market data including daily short sale and call and put option volume were collected for the 30-day time period surrounding the report dates. The following is the finding on the changes in market activities around the dates.

Short Sales And Option Trades Increased After The Releases

Since the downgrade reports were issued by these large, influential institutions, it is expected that resulting bearishness will encourage short sale, put buying and call writing activities. On average, the short sale increased to 9.8 million shares at the release date, compared with 5 million in the regular period (Figure 1). Similarly, option volume (call and put) has increased to 250,000 contracts at the release date from a regular level around 140,000 contracts (Figure 2). There will be an obvious selling pressure on AMD shares following the release of downgrade reports, especially from the well-known investment banks.

The selling is prevalent across all banks. The short volume increased from 6 million shares 5 days before to 10 million shares the day of the announcements. The option volume exhibits a similar pattern of increases. The highly controversial CTS report also exhibits the same selling after its release. The short sale and option volume picked up over the days immediately following the report. Because of the selling after the downgrades, AMD's price dropped from $12.1 to $10.6, approximately a 13% loss (Figure 3). By the way, have you noticed AMD stock prices already being sold down many days prior to the downgrade announcements?

To be clear, up to this point, we are only showing the case that these investment banks’ reports carry market-moving information. However, this is not the reason why we wrote this article.

Short Sales And Option Trades Increased Days Prior To Downgrades

The real question here is whether there were any abnormal market activities prior to the downgrade releases. Unlike scheduled earnings reports, the timing of the release of individual analyst recommendations is unknown to the public (market). Investors should not have private information to act on before it becomes public. Therefore, it stands to reason that there should not be any irregular trading prior to the analyst recommendations in an efficient and legal market environment.

With such a prior, we were puzzled, yet not surprised, by the fact that there was clear excessive selling prior to the downgrade releases. On average, short sale volume, starting to rise 3 days prior to the release days, more than doubled the regular short volume (Figure 1), and it was 80% higher for option volume (Figure 2).

Goldman Sachs (GS), Morgan Stanley (MS), and Barclays (BCS)

For obvious reasons, we presented below individual cases for the trading activities around GS, MS, and Barclays' downgrades.

For all three companies' downgrades, there were clear indications that short volume and option volume surged days before the actual announcements. As the schedule of analyst recommendations are mostly unknown to the public, it is far more interesting to see excessive market activities before the downgrades.

CTS Report

For the controversial report, it exhibits virtually an identical pattern like's its IB counterpart (Figure 9), except the pre-announcement shorting started much earlier, i.e., 10 days prior. Since we don't have their holding on AMD like other institutions, no additional observation can be made. It should be noted that AMD has informed the SEC about the suspicious surge of short sale ahead of the release of CTS report.

Correlation Does Not Suggest Causality

In order to explain the “pattern” rationally, we will start with an open mind. As Wall Street analysts may not be always informed, they often obtain information signals from various sources in order to formulate their recommendations. Short sellers are commonly considered aggressive risk takers with better information. Thus, their short trades become a proxy for quality private information. If analysts incorporate short sellers’ trades into their recommendations, that will create the appearance that short trade volume will precede the downgrade reports. A similar case can be made for generally perceived more informed option traders’ trades. The surge of option volume will also precede the downgrade reports. Although if information in the short trades was incorporated in the decision process, it is unlikely that analysts will only use limited amount of data, i.e., 3 days’ worth of short trades.

Same Institutions Increased AMD Holding After Downgrades

One way to verify this argument is to examine its logical consequences. If downgrade recommendations were formulated on a rational basis as described above, the investment bank which made such a recommendation should reduce its holding on AMD as a result. However, out of the four banks in this study, Goldman Sachs and Morgan Stanley have increased AMD holding significantly after each downgraded the stock, while the others hold their positions (Table 3).

(Author's update dated April 8, 2018)

Mubadala Sold Blocks of AMD To GS and MS Before Downgrades

In the interest of full disclosure, I was informed and have to mention a possibility that was proposed by Rand Walker, who did an excellent analysis on Mubadala's AMD sale to GS (3/5/17, 45 million shares) and MS (8/4/17, 41 million shares). As both sales were placed before their respective downgrades, it is possible that the increase in GS and MS' holding in Table 3 may have been a result of unsold AMD shares from Mubadala.

Finally, to summarize:

1. Prior to investment banks’ downgrade announcements, AMD short volume and AMD option volume increased sharply.
2. Amid downgrades, AMD's stock price dropped 13%.
3. Both short sale and option volume picked up amid downgrades.
4. Goldman Sachs and Morgan Stanley increased their AMD holding significantly after they downgraded AMD's stock.

What do you think has happened?

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

-- We will be glad to provide all the data we used in this study upon request. -- If you are interested in this study, I would recommend that you follow, not me, but my co-authors, Matthew Sweeney and Zachary Gunn, two of the smartest young authors.