The numbers don’t lie
07 July 2020
FIS’ David Lewis takes a look at the data behind the headlines that surrounded Wirecard’s recent fall from grace
Image: Shutterstock
Maths and science are subjects full of irrefutable facts and laws. Consistent application of those laws provides certainty of outcomes – the numbers never lie. Once the numbers are produced, however, we make the transition from the realm of the scientific to that of the subjective, and its game on in terms of interpreting data to produce actionable information upon which to make reasonable decisions. Very few people from anywhere in the world could have escaped the deluge of data and numbers available to them regarding the spread of the COVID-19 virus and the ensuing pandemic. Such data has flowed in vast quantities and widely varying degrees of accuracy through both official and, shall we say, more informal channels.
Many casual observers have absorbed and analysed these data points to either come to a reasoned analysis of their situation and the relative risk of the position that they find themselves in, or they have used the data points that suit their predetermined conclusions. This is where subjectivity makes its entrance, allowing interpretation of the data by non-rational processes. The polarisation of views over the cause, extent and real threat level of the COVID-19 pandemic is a master class in the application and interpretation of data to suit other agendas and predetermined outcomes. Is this a situation that can be solved for or avoided in financial markets?
Trading algorithms that run high-frequency trading, for example, are deemed highly efficient at finding and exploiting even the tiniest windows of financial opportunity due to their tireless and extraordinarily rapid analytics and decision-making. However, such capabilities are also blamed for “flash crashes” and other tailspin-like events that sometimes suddenly and inexplicably strike financial markets. How can this be? The machine cannot be distracted, tired or even panic. It can only follow the program and rules it is set to follow – and therein lies the weakness. It is not the computer at fault, but its programming, or programmer(s). At some point in the development of the algorithm, there has been an interpretation of a scenario with a given outcome, or probability of an outcome, that has not matched the reality of the situation. Whether that is a genuine or negligent mistake is of little consequence to those that see their investments crash in the blink of a flash crash.
In other cases, seemingly irrational decisions can be made with apparent disregard for the data that appears in plain sight. Take Wirecard AG, for example. Less than two weeks ago, the company share price was a little over €104 apiece. While this is down significantly from the 12-month high of €159.60 seen in September 2019, it still made Wirecard a €13 billion company. Multiple red flags had been raised over the past few years, with various allegations of wrong-doing and misrepresentation of accounts, some of which came from well-known activist short sellers. Short sellers have been riding the Wirecard wave for some time, see Figure 1,overleaf. Volumes really began to ramp up at the start of 2019, trending down again through the third quarter only to jump upward in two large steps, peaking in quarter one this year. Utilisation, by contrast, burst through 75 percent in October 2019 and didn’t fall below it again. Despite this, the company managed to rise in value from around €115 a share to over €140 not once, but twice between October 2019 and April 2020.
The final straw was the fourth delay in a row regarding the publication of audited results. When the company auditors refused to sign off the accounts citing a near €2 billion hole in the German payment providers finances. The former chief executive was then arrested on suspicion of accounting fraud, announcing the beginning of the end for the company and a collapse in the share price as it filed for bankruptcy protection. At the time of writing, in a telling illustration of risk of not looking behind the headlines, the share price had gained by a surprising 155 percent on the day, to close at 3.34 euros. While such a percentage gain would be lauded by many companies, this still represents a fall of over €101 or 97 percent in recent weeks. The market capitalisation that evaporated over the past 14 days amounted to some €12.6 billion.
With multiple red flags and warnings across the market, what kept the valuation so high? Hindsight is a wonderful thing, of course, but the concerns surrounding this company have been around in the public domain for an extended period. Short sellers have certainly proved their worth this time around, highlighting an allegedly fraudulent company that has secured capital and investment well beyond its worth, damaging investors and, to an extent, the industry. Much has been written about the returns that short sellers have made as a result of the Wirecard debacle, but it should not be forgotten that there is an equivalent value that has been lost from the holders of long positions in these shares – less, of course, the income they have gained from lending them at what became some very-high rates in the last few weeks.
While short interest signals are a proven leading indicator of price actions, such data becomes significantly more powerful when combined with other evidence and information. All investors need to be very careful around the information contained in individual headlines or carefully selected data points, such as those seen today citing a “surge in Wirecard shares” even after the company has filed for insolvency. The shares had indeed risen 155 percent, but from a very low point indeed. There are many valuable data points available in the financial markets, and no shortage of sources of opinion and advice to absorb and assimilate. The application of irrefutable facts and laws is a given, but the real answers lie in actionable information analysed in the right context.
Figure 1: Wirecard AG shares on loan and utilisation over 24 months till 29 June 2020
Many casual observers have absorbed and analysed these data points to either come to a reasoned analysis of their situation and the relative risk of the position that they find themselves in, or they have used the data points that suit their predetermined conclusions. This is where subjectivity makes its entrance, allowing interpretation of the data by non-rational processes. The polarisation of views over the cause, extent and real threat level of the COVID-19 pandemic is a master class in the application and interpretation of data to suit other agendas and predetermined outcomes. Is this a situation that can be solved for or avoided in financial markets?
Trading algorithms that run high-frequency trading, for example, are deemed highly efficient at finding and exploiting even the tiniest windows of financial opportunity due to their tireless and extraordinarily rapid analytics and decision-making. However, such capabilities are also blamed for “flash crashes” and other tailspin-like events that sometimes suddenly and inexplicably strike financial markets. How can this be? The machine cannot be distracted, tired or even panic. It can only follow the program and rules it is set to follow – and therein lies the weakness. It is not the computer at fault, but its programming, or programmer(s). At some point in the development of the algorithm, there has been an interpretation of a scenario with a given outcome, or probability of an outcome, that has not matched the reality of the situation. Whether that is a genuine or negligent mistake is of little consequence to those that see their investments crash in the blink of a flash crash.
In other cases, seemingly irrational decisions can be made with apparent disregard for the data that appears in plain sight. Take Wirecard AG, for example. Less than two weeks ago, the company share price was a little over €104 apiece. While this is down significantly from the 12-month high of €159.60 seen in September 2019, it still made Wirecard a €13 billion company. Multiple red flags had been raised over the past few years, with various allegations of wrong-doing and misrepresentation of accounts, some of which came from well-known activist short sellers. Short sellers have been riding the Wirecard wave for some time, see Figure 1,overleaf. Volumes really began to ramp up at the start of 2019, trending down again through the third quarter only to jump upward in two large steps, peaking in quarter one this year. Utilisation, by contrast, burst through 75 percent in October 2019 and didn’t fall below it again. Despite this, the company managed to rise in value from around €115 a share to over €140 not once, but twice between October 2019 and April 2020.
The final straw was the fourth delay in a row regarding the publication of audited results. When the company auditors refused to sign off the accounts citing a near €2 billion hole in the German payment providers finances. The former chief executive was then arrested on suspicion of accounting fraud, announcing the beginning of the end for the company and a collapse in the share price as it filed for bankruptcy protection. At the time of writing, in a telling illustration of risk of not looking behind the headlines, the share price had gained by a surprising 155 percent on the day, to close at 3.34 euros. While such a percentage gain would be lauded by many companies, this still represents a fall of over €101 or 97 percent in recent weeks. The market capitalisation that evaporated over the past 14 days amounted to some €12.6 billion.
With multiple red flags and warnings across the market, what kept the valuation so high? Hindsight is a wonderful thing, of course, but the concerns surrounding this company have been around in the public domain for an extended period. Short sellers have certainly proved their worth this time around, highlighting an allegedly fraudulent company that has secured capital and investment well beyond its worth, damaging investors and, to an extent, the industry. Much has been written about the returns that short sellers have made as a result of the Wirecard debacle, but it should not be forgotten that there is an equivalent value that has been lost from the holders of long positions in these shares – less, of course, the income they have gained from lending them at what became some very-high rates in the last few weeks.
While short interest signals are a proven leading indicator of price actions, such data becomes significantly more powerful when combined with other evidence and information. All investors need to be very careful around the information contained in individual headlines or carefully selected data points, such as those seen today citing a “surge in Wirecard shares” even after the company has filed for insolvency. The shares had indeed risen 155 percent, but from a very low point indeed. There are many valuable data points available in the financial markets, and no shortage of sources of opinion and advice to absorb and assimilate. The application of irrefutable facts and laws is a given, but the real answers lie in actionable information analysed in the right context.
Figure 1: Wirecard AG shares on loan and utilisation over 24 months till 29 June 2020
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