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> But on that day in August, when Muddy Waters tweeted that it would release a report about an accounting fiasco at a London-listed firm, Block noticed an inter

by gwern 7y ago

> But on that day in August, when Muddy Waters tweeted that it would release a report about an accounting fiasco at a London-listed firm, Block noticed an interesting development: the stock of NMC Health dropped. “We had tweeted in advance an innocuous comment about our intention to initiate a campaign the next day on an unnamed London listed firm. NMC happened to drop significantly on the tweet. That’s a pretty strong indication that the market knows something isn’t right at the company, so we took a look….” Block told ET Magazine in an emailed response. What they found was not pretty. That's the most interesting 'event study', as it were, I've heard of since the Challenger or Alchian's nuclear bomb market study. It's amazing the things that the market 'knows'. I sometimes wish that event studies could track down the specific traders responsible and understand what exactly they know and how they learned it, because it otherwise is such voodoo.

Scoundreller 7y ago
Could have been actual insiders dumping.
- gwern 7y ago
  That seems somewhat unlikely. Only a few insiders would realize the full dimension of the accounting fraud or the implications of some obscure figures, insider sales are reported and ones which aren't part of pre-planned sales are often noticed, to singlehandedly tank the stock would require a lot of sales, and why would these insiders be avidly following the tweets of a relatively obscure short-seller and instantly commit a large fraction of their net worth to a sale based solely on the possibility that a random tweet refers to them?
- cwilkes 7y ago
  Hard to tell without knowing what happened to other like companies. Perhaps they all went down on the news? If so it wouldn’t make me feel any better About those others.
robk 7y ago
The whispernet is strong and favors those in the right cliques in after work drink scenarios. Guess when people realize the whispers are true it leads to market behavior indicative of the implications before.
- pradn 7y ago
  Doesn't the Bloomberg terminal also have a private chat feature?
- yellowstuff 7y ago
  That's true, but as the example of Muddy Waters shows, a good investment analyst who focuses on frauds can find enough evidence to short a stock without relying on anything except public information. It's entirely possible that NMC was someone's short thesis and the tweet from Muddy Waters gave them enough new information that they decided to trade.
hn_throwaway_99 7y ago
I was confused about this comment, and wish the article explained it more. When Muddy Waters first put out the tweet, were they: (a) planning an investigation of NMC, and the market validated their suspicions when the stock dropped? (b) planning an investigation of another firm, but then when NMC stock dropped thought "Hey, did we just freak out a bunch of in-the-know traders that something fishy is going on with NMC?" and then start the NMC investigation based on that? If this is the right answer, what was the other firm they were planning to investigate? (c) not really planning an investigation of any firm in particular, but threw out that tweet in the hopes that someone would bite, and when NMC traders "bit" by selling, that's when they started their investigation?
- PaywallBuster 7y ago
  I think they announce in advance they will short and publish report on a unspecified company. In this case they just mentioned the Company is listed in LSE, and the traders figured out by themselves who was it. Because they need to build their short positions before making everything public. In this case maybe they lost profits if the market adjusted before they finish setting up their positions
- jsanford9292 7y ago
  Looks like (b) is the answer. They released this tweet on Aug 7, 2019 (the next day after announcing they were targeting an LSE-listed company): https://twitter.com/muddywatersre/status/1159009866020618241 https://twitter.com/muddywatersre/status/1159009866020618241 Pretty amazing that they went through and took a look at all the companies whose stock prices dropped from Aug 6-7th on LSE as a sort of "business development" opportunity.
  - hn_throwaway_99 7y ago
    Thank you! So in my opinion that is even more impressive, and actually somewhat hilarious. They sent out the tweet which was about prepping to short Burford Capital (which apparently had such non-existent governance as the CEO is married to the CFO), then the NMC traders all went "Oh shit, he must be talking about us!!" It's like the old trope where the accuser says to a group of people "I know what you did!", and then everyone in the group confesses to various misdeeds even though the accuser was only talking about one of them.

by gwern 7y ago

Scoundreller 7y ago

Could have been actual insiders dumping.

gwern 7y ago
That seems somewhat unlikely. Only a few insiders would realize the full dimension of the accounting fraud or the implications of some obscure figures, insider sales are reported and ones which aren't part of pre-planned sales are often noticed, to singlehandedly tank the stock would require a lot of sales, and why would these insiders be avidly following the tweets of a relatively obscure short-seller and instantly commit a large fraction of their net worth to a sale based solely on the possibility that a random tweet refers to them?
cwilkes 7y ago
Hard to tell without knowing what happened to other like companies. Perhaps they all went down on the news? If so it wouldn’t make me feel any better About those others.

robk 7y ago

The whispernet is strong and favors those in the right cliques in after work drink scenarios. Guess when people realize the whispers are true it leads to market behavior indicative of the implications before.

pradn 7y ago
Doesn't the Bloomberg terminal also have a private chat feature?
yellowstuff 7y ago
That's true, but as the example of Muddy Waters shows, a good investment analyst who focuses on frauds can find enough evidence to short a stock without relying on anything except public information. It's entirely possible that NMC was someone's short thesis and the tweet from Muddy Waters gave them enough new information that they decided to trade.

hn_throwaway_99 7y ago

I was confused about this comment, and wish the article explained it more. When Muddy Waters first put out the tweet, were they: (a) planning an investigation of NMC, and the market validated their suspicions when the stock dropped? (b) planning an investigation of another firm, but then when NMC stock dropped thought "Hey, did we just freak out a bunch of in-the-know traders that something fishy is going on with NMC?" and then start the NMC investigation based on that? If this is the right answer, what was the other firm they were planning to investigate? (c) not really planning an investigation of any firm in particular, but threw out that tweet in the hopes that someone would bite, and when NMC traders "bit" by selling, that's when they started their investigation?

PaywallBuster 7y ago
I think they announce in advance they will short and publish report on a unspecified company. In this case they just mentioned the Company is listed in LSE, and the traders figured out by themselves who was it. Because they need to build their short positions before making everything public. In this case maybe they lost profits if the market adjusted before they finish setting up their positions
jsanford9292 7y ago
Looks like (b) is the answer. They released this tweet on Aug 7, 2019 (the next day after announcing they were targeting an LSE-listed company): https://twitter.com/muddywatersre/status/1159009866020618241 https://twitter.com/muddywatersre/status/1159009866020618241 Pretty amazing that they went through and took a look at all the companies whose stock prices dropped from Aug 6-7th on LSE as a sort of "business development" opportunity.
- hn_throwaway_99 7y ago
  Thank you! So in my opinion that is even more impressive, and actually somewhat hilarious. They sent out the tweet which was about prepping to short Burford Capital (which apparently had such non-existent governance as the CEO is married to the CFO), then the NMC traders all went "Oh shit, he must be talking about us!!" It's like the old trope where the accuser says to a group of people "I know what you did!", and then everyone in the group confesses to various misdeeds even though the accuser was only talking about one of them.