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April 2, 2021

DISCOVERY – Another anomaly in the market

Reading time:5 min

Little has happened at Viacom and Discovery's events. Shares, which have seen an alarming growth in recent days, have now slid and are in solid sell-offs. This was due to the liquidation of positions. Archegos Capital Management was forced by banks to sell more than $20 billion worth of shares after some positions were moved against it.

Walt Disney owns some of the most globally recognized characters, from Mickey Mouse to Luke Skywalker. These characters and others are featured in several Disney theme parks around the world. Disney makes live-action and animated films under studios such as Pixar, Marvel, and Lucasfilm and operates media networks including ESPN and several TV production studios.

What happened?

Little has happened at Viacom and Discovery's events. Shares, which have seen an alarming growth in recent days, have now slid and are in solid sell-offs. This was due to the liquidation of positions. Bloomberg News reported that Archegos Capital Management was forced by banks to sell more than $20 billion worth of shares after some positions were moved against it. Meaning, Swiss banking giant Credit Suisse (CS) has warned that volatility stems from the firm's liquidation will force the bank to hit first-quarter results "highly significantly."

I recall that, along with ViacomCBS and many Chinese technology stocks, Discovery Class A was one of the shares that saw a block deal related to the forced liquidation of positions associated with Bill Hwang Archegos' hedge fund. However, while many expected the revival to push Class A shares sharply higher now that the release appears to have ended, Class B stocks where the trading frenzy took place on Wednesday, with 684,000 shares on Wednesday, more than the 20,000% three-month average.

Spread between DIS stonk Class A and Class B
Source: Tradingview

According to Bloomberg, Bright Trading prop trader Dennis Dick said what is happening may be an extreme example of what an "arb squeeze" where instead of buying Class A shares, funds who were forced to buy-in due to a short squeeze or some other reason, have moved to the Class B shares instead:

"It could be that arbitrage traders went in and maybe found that it was tough to borrow on one share class, so they went into the one that is more thinly traded. Just because the share classes are fundamentally linked, that doesn't necessarily mean they will trade alike".

We can see an exemplary example of an anomaly in the market that is not a shortage in 2021. It should be mentioned that although Class A and Class B shares may not trade equally, in the medium term, the price is fundamentally tied. It means that if there is a discrepancy between them, it is a short-term opportunity to correct this "side effect." This phenomenon can be seen in the following graph, which shows the spread between Class A and Class B.

Spread between Class A and Class B
Source: Tradingview

This gap has widened in recent weeks. However, Class A is much more liquid, so investors are looking for this form logically. However, Class B completely broke away from reality, which is also indicated by a significant spread at the end of March and April. We have given the reasons for the increase above. We assume that such a considerable spread will not last long, maybe 1-3 weeks, until the spread decreases significantly. Different strategies can be applied through CFDs (long of one asset and short of another), and the target should not be set by the price but by the spread's average over the last 10-15 days (somewhere at $ 20). Different strategies can also be applied through option contracts.

Useful sources: Bloomberg, Yahoo Finance, Tradingview

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Walfir Technologies
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WALFIR Technologies is one of the three divisions of WALFIR s.r.o., which is based in Slovakia. The primary interests of this division are analytical, quantitative, and algorithmic systems. The core of the team (Lubos Snirc and Patrik Mackovych) is involved in the Investro project. Both have experiences in global financial and investment analytics and their articles and analyzes can be found on major financial news portals.

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