Why Is Citadel Suddenly Trading AST SpaceMobile?

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[00:01:00] Speaker A: Everyone, I am currently driving to go run an errand, and of course it's New York traffic, so it's 30 minutes or so. So I figured I'd just fire up a space and talk about a few thoughts about markets. I guess first that some folks had some questions about a thread that I had posted yesterday. Just given everything that went down with Situational, I thought it would be interesting to just check and see trading activity in some of Leopold's names. And the first thing that I pulled up was T.1 Energy, a situation that I've been in since the stock was in the, you know, dollar level. And unsurprisingly, I saw that Citadel was the top advertised trader In T1 Energy. And so what that told me is that, you know, it's likely that Citadel has started, as of yesterday, started unwinding some of the books. You know, Citadel as a market maker, previously I had not seen them active in T1, and they were not active over the last 6 days or prior 6 days, but then yesterday they ended up showing up as a number one trader. And so that led me to post about it. Unsurprisingly, you know, they're trading T1, just given that they probably adopted some position depending on how much Leo had left of that stock. They were trading it, right? Either exiting or also facilitating some level of trades. So then that led me to look at other situational awareness positions. And so I just went down the list and sure enough, NBIS, IREN, any number of names that Leopold was heavy in, SanDisk. Citadel was the number one trader yesterday after not showing any advertised volume in the prior 6 days. And so that made sense, right? I mean, they just took on Citadel, bought at a discount, You know, Leo's book, probably a vast majority of it, because I think when people talk about $10 billion of AUM that he has left over, that also includes some of the private stuff that he held onto, which would, you know, includes Anthropic. So, you know, he probably sold a vast majority of his book. And in these types of situations, by the way, you know, the discount that Citadel paid was probably pretty hefty. I mean, it was a competitive situation. You had Millennium and Jane Street, our friends at Jane Street, all bid on that book. My guess is there probably were some banks bidding on that book as well. But, you know, my guess is perhaps they bought the book at a discount of 20% or 30%. I mean, you know, you have to keep in mind that these are all high-beta names and have been on the way down, but obviously, When you're buying these names down 60, 70%, you're probably feeling pretty good about perhaps it being a near-term bottom, technical bottom. And then by purchasing at a 20% discount or 15% discount, you have the ability to at least, you know, if the stocks stay flat, to profit from that by exiting. And, you know, these are all highly liquid names, so I don't think Citadel felt uncomfortable about taking on that risk. But as part of that, once you take on the book, then you would look to monetize it, right? Unless they're— unless there are some pods at Citadel that wanted to adopt those positions, but otherwise you would look in an orderly and efficient way and profitable way to exit these positions. And so if you just look across all of Situational Awareness's positions, Citadel is a number one trader, right? And so that makes a ton of sense. And then I also looked, you know, there were a few names. For example, I have a small position in Sharon AI. Situational did a private placement recently with Sharon. So I'm not sure if they had a public position left over and now they're in a, you know, restricted or a position from the private placement that requires some holding period. But Citadel was not a top trader in that name, interestingly enough. But, and I think there was like, there was one more, one other top holding where they weren't, they didn't show up. But that exercise then led me to, you know, someone had asked, well, is, you know, in a joking way, is Citadel trading AST? Because maybe Situational had a position. And I kind of laughed at that, but then I was like, okay, you know, I'll check. And then Lo and behold, Citadel was the number one trader in AST. I've never really seen them ever trade AST before, and they were not— they had not traded AST for the prior 6 days. And so then I looked at Rocket Lab, and Citadel's there. Then I looked at SpaceX, Citadel's there. Then I looked at Redwire, uh, Intuitive Machines, um, Citadel's there. And then, uh, but that didn't extend to other space names, but just kind of the the higher market cap companies. And then that led me to then look at some other sectors. So I looked at Robinhood, Coinbase, and Citadel was a merchant trader. And I looked at the prior 6 days and they were not there. And so I did this over a few other names and interestingly enough, Citadel was active in all those. And so my conclusion is that when you You know, when you buy a book of risk that's several billion dollars, you're not going to take market beta risk as a result of that. And so there's a number of things that may have happened here. One, if Citadel knew that they were taking on this book, or there was a good chance that they were going to take on this book, there is a possibility that they, over the prior days, they could have either bought put options in some of these other sectors. Right, in order to create a beta hedge. Or, and so that could that could happen partially on listed exchanges, or they could go to Goldman or any number of banks and have them create a custom swap short. Or they could also do something, do an over-the-counter put, you know, over-the-counter put options on a number of these names. So there's a there's a number of different ways they could do this without actually. They themselves shorting the stocks, or the other the other explanation could be that they over the yesterday's rally they actually entered into short positions on some of these names because they were trading trading them. But either way, this is just this is kind of the dynamic where Citadel has now become active in all these names because they they probably have. You know, when people might ask, well, why are they trading these other sectors? Well, if you take on a multi-billion-dollar book of long positions in high-momentum names, you're not going to be exposed like that. You're going to want to hedge the beta exposure that you have. And so one way to do that would be to hedge peers or to hedge other sectors that seem highly correlated, which is momentum. And so that's when I posted yesterday that, you know, they, it's likely that Citadel has some degree of a hedge on these sectors. And yesterday either they perhaps were covering part of it as they were unwinding Situationals book, or the other explanation is as they were unwinding Situationals book for the remaining portion of what they have, they could be shorting these names to at least get a hedge on the rest of it. But anyway, but this is all technical stuff, meaning, you know, as of, I think so, so I was speaking with one company and they were saying that they had heard Situational was unwinding their books and shopping some positions as of last week. And I didn't know that until yesterday. And so there was someone who I speak to in the hedge fund world that was telling me that there were rumors that, that situational was unwinding some positions as of Wednesday. And so as, as a retail investor, like the rest of you guys, if, if I was hearing this stuff Friday, Wednesday, then people certainly do on Monday in the institutional world. And by probably the guys who are really on top of things, they probably were hearing stuff by the end of last week. And so I did part— I did repost an interview That Martin Shkreli did where he talks about how hedge funds, when you get wind of this stuff, they start to pick off your book. And so this is a true, this is definitely what happened. Like this is something that I learned back in the great financial crisis when I moved over to the buy side and I worked at a hedge fund. One of the things that you would do over 2007 when things started cracking in 2008, and then of course subsequent events as well. But whenever people heard that a hedge fund was in trouble, the first thing, it was your duty to go to Bloomberg and pull up their holdings and see, first of all, if you had any cross-holdings. So if a hedge fund was in trouble and, you know, some of their top positions might be things that you own. One of the first things that you do in terms of risk management is you sell out of that position because you know that it's going to get liquidated. And so you get ahead of the selling, right? And then after you do that, then the next thing you would do is, and this is, you know, this is for people who, if you had the ability to take directional bets and of course were disciplined enough, then you might go short those names. Because you knew that there was going to be a forced liquidation. And so, and everybody else was looking at the same things. And so there was going to be some level of momentum. The risk, of course, is that, well, first of all, if you sell out of your long position, that's not really much of a risk because then the risk is off your books. But if you're going to take a directional short on a hedge fund being forced to liquidate, you have to time that really well, right? Because they're There's going to be this event, right, where people, you know, if you're shorting and there's a momentum downwards and it's creating even more stress on that particular hedge fund, then obviously what we saw was situational. They're going to be forced to do something drastic, right? And everybody's kind of piling into that short and you're going to, what ultimately happens is you're going to have an overswing to the downside. Because in that situation, everybody's short and then the hedge fund, you know, they're at the mercy of the markets. And so they have to take whatever the best bid is for their position or they're liquidating, you know, in the market. And so as a result, you're going to have these overswings to the downside, which is what we saw, right? So on Wednesday we saw that, I mentioned in my space that it looked like someone was getting liquidated. After market on Wednesday, because even after the markets, all these positions closed on the lows, you saw positions move even further, 3, 4, 5% down. I mean, AST, for example, I think hit like 50 and change or 51 because of, and you know, sometimes people don't understand. They're like, well, you know, AST is not in situational awareness's book, so why is it moving down? Well, you have to remember that a lot of stuff that situational owns is momentum. And there's going to be cross holdings, right? Whether it's a hedge fund or even if it's a retail account, folks who own Nebius, there's probably a decent amount who also and own Sandus. There might be a decent amount of people who own AST Space Mobile, right? And so if you're meeting margin requests, then you're going to look to gross down your book. And maybe if you believe in Nebius more than AST, then you might sell some AST. And so all this stuff is is pretty much. In these situations where you have deleveraging, the correlation for a certain factor essentially goes to 1, right? And so anyway, going back to what I was saying before, when you have essentially like a run on the bank, but more so it's like, you know, Wall Street's a really, it's a dog-eat-dog world, right? And so when people smell blood, they just go to town, which is why Being a professional investor, it's really tough because it's not just about getting things right, getting calls right, because as we all know, the markets can remain irrational longer than your ability to stay in the market. And the same holds true when people smell blood and they come after you, right? And so in that, in situational awareness is in that position where, you know, I think Leo, now we know according to articles from Wall Street Journal, Bloomberg, Leo was out shopping some of his private stakes as of 2 weeks ago, a week ago, and maybe the, probably the prior week. And so when people hear about that, and this is the issue, like if you're in distress, then word travels fast, right? So if Leo was shopping some of his private stakes to people, That definitely eventually got to hedge funds, right? And then hedge funds hear that and they're like, you know what, if he's in trouble and he has to sell some of these private stakes, we need to sell our long positions in SanDisk and Nebius and IREN, T. Nguyen Energy, all these things. And then not only that, we're going to go short. We're going to go short. We're going to press on this guy because we know he's going to be a forced seller. Because if he's selling those private stakes, he's trying to, if we put pressure on his public book, he's ultimately going to have to sell those too. Now there is risk, right? Because if you take a short position in some of these names and let's say like, I don't know, the Iran war gets resolved quickly and there's some other positive things, it can rip in your face. But yeah, these things, when it's built on leverage, when you have Folks in Korea who are all in, and you have people here in the US who are all in on margin. I mean, we've seen all the horror stories. It's pretty easy to create a run, right? You just have to push on it a little bit and all of a sudden momentum works in their way. Unwinding begets unwinding, leverage comes out of the system and it's brutal. I think this was a I think it was like a, I gotta go back and look, but I think it was like a 10 sigma, like not a 2 to 3 sigma event, but it was like an 8 or 10 sigma event over the last few days that we've had, which is insane. But yeah, so when you have this deleveraging and there's blood in the water, of course then Situational was in a tough spot where because of the margin they were using, There was a wipeout risk, right? I mean, ultimately he did get out with $10 billion of AUM, which is huge. Like he's still up a lot. But at the same time, I think his gross book was up to what, $40 billion, which is $45 billion. And so all that was wiped out or not wiped out. It was, it took a mat— he took a huge hair— I mean, he was down a lot and then he had to take a haircut to move it off off his books. And so yeah, it's a tough lesson. I think as I've always talked about, you know, in order to be a great investor, you have to lose at some point in your time in the market. Hopefully it's just once, but you have to lose a really painful amount of money in order to understand risk and to understand loss, right? And You know, Leo's a really smart guy. He's very young. And so while smart, he doesn't, he didn't have the experience in the market. And this will be something that he clearly will. Well, there's definitely something to learn from. Will he take those lessons? Who knows? But yeah, that was a, I think looking back over the last 2 months, it's now pretty clear, you know, what happened. with momentum. And I know people were lamenting, well, the company X or Y has positive news, why isn't it performing? Everything just keeps going down. Well, leverage was coming outta the system, right? And I think outside of Leo, you're gonna hear, aside from just retail stories, like I was looking at Bloomberg, I think there's 2 funds already that are coming out that were down like 40 or 50%. In this month alone and down year to date as a result. So there's definitely going to be some pretty bad stories come out of this. But the good news is that now that you have leverage out of the system and things are kind of reset, hedge funds have degrossed and now are at this point where, and by the way, hedge funds were not unscathed in this. I think At least as of last week, there's some articles saying overall strategies were down mid-single digits or high single digits, which for hedge funds is pretty high. And that's just the average. Whereas individual fund performance is probably going to, you know, you're going to see some eye-popping numbers of folks who are down because everybody, I think, in the hedge fund world was long, you know, the AI trade. And so there's going to be some pretty ugly numbers that come out. But But yeah, going back to what I was saying before, the good thing is that leverage is out of the system and now you kind of can start basically with a clean slate. And so maybe if things are stable now to a degree, you know, we got that, that the worst didn't raise rates and people are still kind of digesting the news there. And is the Fed going to give guidance anymore around for, for decisions, or is it going to be more data-driven? Are we going to be using alternative sources of data? You know, what's going to happen in Iran? Of course, there's a lot of uncertainty still, but at least the, the leverage that everybody had been pointing to as being unhealthy, a lot of that has been unwound. And unfortunately, a lot of— there's been a lot of suffering as well. But now that the deck is—
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[00:21:05] Speaker A: Now maybe we're at this point where fundamentals and news and you know, performance matters for companies, which is a good thing. So, so yeah, I think, I think now, you know, obviously people are digesting all this news and people are trying to figure out, is this a dead cat bounce or are we still going to continue to grind lower? I mean, as I mentioned before in another space, I think fundamentals of a lot of companies are still very positive. And, and of course, there's still concerns around the AI bubble, but I think in terms of valuations, we've taken a pretty massive haircut, which I think markets would tell you that that's a good thing, consolidation of gains and of course unhealthy leverage taken out. So we'll see, we'll see how things go. But I, in particular for AST and other positions, if you liked it, at 50, or, you know, some of these instances 100% higher. Because as you guys know, in terms of percentages, if a stock is down 50%, it's, you need to go up 100% to make it back. But if you liked it that much higher before, then you're gonna love it down here, right? If fundamentals have either haven't changed or have improved. And so of course, as we all know, macro matters the most and And if there's still more issues to come, then we'll see. But clearly the risk reward on a lot of these stocks are much more attractive than they were before. So anyway, yeah, that's kind of mostly what I had to say. I mean, I think the period that we just went through was pretty harrowing, but it's important to remember That a lot of these stocks, you know, there's obviously folks, well, yeah, a lot of these stocks, first of all, are still up nicely from whether it was the beginning of the year or from the prior year. And so, yeah, I would say in terms of mentality, don't look back at peaks and say to yourself, well, I need, that was mine and I need to make it back. I talked about this space yesterday. That's probably the quickest way to ruin it, which is trying to make things back, um, what was a paper game. And so, you know, from a mental health perspective, don't beat yourself up. And, you know, the key thing is just not being in margin and staying in the market, right? Like holding high conviction ideas and, um, and being able to ride volatility. Um, but yeah, I think I think the other thing, actually, I forgot my other thought, but yeah, I think we all, for those people who've been in the market for many years, there's always going to be these episodes of euphoria and deleveraging where there's something new and exciting and it seems game-changing. Things are going to get priced to the upside, they're going to be overpriced and then you're going to have some deleveraging event, which is what we had. And by the way, like there's been a number of these, right? Like when we went through the tariff tantrum last April, or I think in October when crypto got demolished, you know, there's a number of these things, right? It seems like the cycles are happening faster, which is something to keep in mind because I think When people are on leverage, they— and I keep talking about this, but when people are on leverage, you feel like, oh yeah, I have an edge and things are going to keep going. But it doesn't matter if you're right on an individual company's execution or trend, the macro will wipe you out, right? And so that's why you don't, especially for high beta stocks, like you don't want to be on margin because ultimately It's not a matter of if, but when you're going to get wiped out or take a pretty painful, you know, loss. But anyway, I'm at my destination now, so I'm going to cut the space here. But I just wanted to share a few thoughts about yesterday with Situational and some of the trading dynamics. I do think, you know, with this, with that clearing event and You know, a, I guess, a sacrifice to the market and something that big. I mean, $45 billion of AUM, or not AUM, but of deployed capital coming outta the market. Like, that's huge, right? 'Cause it's not just situational, it's also other hedge funds that were long those trades, other retail Korean investors too, all those guys getting wiped out. So it's not just that number, it's multiplied by several factors. So yeah, I would say the market is in a healthier place today and we'll see maybe, or companies like AST where you have a number of big catalysts that are coming up in August now, the market will start pricing that in versus the market just really reflecting deleveraging and a one-way road down. So anyway, That's all I had for this morning. I've gotta hop because I'm here at my destination, but thanks everyone for joining and we'll talk again soon. Hi, it's Redrum here. Before we wrap up, I want to hear from you. I've left a pinned comment down below asking, Citadel went from zero volume to number one trader in AST overnight. Coincidence or hedge? Head down to the comments and drop your take. I'll be reading through all your replies. Thanks for listening to the AST Space Mobile Podcast. If you enjoyed this episode and you'd like to help support the podcast, please share it with others, post about it on social media, or leave a rating and review. To catch all the latest news about AST SpaceMobile, make sure to subscribe. Thanks again, and I'll see you next time. Listen. Mmm, waffles.