So, about market manipulation… (part II)

Welcome back!

Have you read the first part? If not, you can find it here.

I advise you to do that before continuing with this one, otherwise things mentioned here might not make all the sense they should.

A part of a movement

Listen, I’m not naive enough to say that there are absolutely NO shady dealings and no manipulation present in the markets at all. When money is involved, morals often take the long way home.

As Metallica knew all the way back in 1991, it’s sad but true.

But retail traders are often the victims of self-imposed losses. Read that again. Not ‘cause of evil, malicious funds hunting for their stops, but because they simply – and I repeat this for emphasis – make bad decisionsSidenote: Not excluding yours truly.I lost almost two thirds of my life savings at one point and writing an article about it has been a lot of fun.Read it here. End of sidenote..

Okay, hey, I’ve been seemingly bashing retail traders for quite some time now. But we’re actually a force to be reckoned with.

Plot twist!

By some accounts retailers today comprise approximately 20% of daily US equity trading volume.

You might think that’s not too much, but the Strait of Hormuz facilitates the transfer of “just” 20% of the world’s oil and while it’s shut you’re paying more at the gas pump. Even if you live on the other side of the planet.

The economy’s a bitch and markets are its little cousin.

Now this might sound unflattering, but what retail traders provide first and foremost, is a much needed source of liquidity. On both the entry and exit side.

Translation: if institutions want to open or close big positions, they need someone on the other side to sell to them, or buy from them. When it’s not other whales, that someone is often you, or me, or your neighborhood crypto bro.

Now imagine a fifth of market volume just gave up and vanished.

That’s billions of dollars (euro, yen…) leaving the action. The massive liquidity drain would make it that much slower and more difficult to actually do transactions in today’s fast-paced markets.

Ask yourself, and answer honestly: if trading really were this extermination battle, this merciless David vs. Goliath, isn’t this liquidity evaporation exactly what would happen? And make no mistake, the institutions would win. They’d drive retailers out if it were their goal.

Because, I mean, if you lost all your money, would you stick to trading?

You and me, friend, we’re part of a market movement. Individually, we don’t matter that much in the grand scheme of things, but taken as a wholeSidenote: Funny thing, we retail traders are a heterogeneous bunch, united mostly by our structural disadvantages when compared to institutions.But, hey, popular uprisings toppled empires more than once, so good for us. End of sidenote., be damn sure we do.

It is very much in the interest of institutions for retail traders to stay in the game. Not out of charity or benevolence, it’s simply practical thinking. A matter of sufficient liquidity, to be precise. Sure, they’ve got no qualms taking your money, but they’re not the Grinch.

And even though claims of manipulation make for better TV, sometimes institutions actually do much needed plumbing work to stabilize the markets. For the benefit of all, including retailers.

Case in point: Leopold Aschenbrenner’s fund implosion.

Situationally overleveraged

What happened?

Long story short: a young guy with notable hair and a purported knack for investing borrows a lot of money to amplify his exposure in a heavily concentrated growth portfolio, it works great, until it doesn’t, and then banksSidenote: Goldman Sachs, JPMorgan Chase and Bank of America. End of sidenote. start making calls, the uncomfortable ones, the margin ones, and then it all starts unraveling and the portfolio loses like four fifths of its assets and the internet loses its mind. The end.

Sound familiar?

Probably so, because this has happened in the past and will happen in the future. Archegos 2021. Long-Term Capital Management 1998. Quote me on it.

But I want to give credit, where credit is dueSidenote: Ha! End of sidenote.. This story is fascinating and I actually and unironically hold a great deal of respect for Leopold Aschenbrenner, the young guy in the picture.

So what’s his deal?

This 25-year-old former OpenAI employee launched a fund called Situational Awareness, which, in hindsight, was quite an unfortunate name choice.

But etymology aside, the fund’s performance was great.

At its peak, it was up 439% in just 6 months, which is, hats off, astonishingSidenote: Since its inception in 2024 it was up more than 1,000%. End of sidenote.. The vast majority of its holdings were individual companies, not ETFs, which goes to show that stock picking is very much alive and well and Mr. Aschenbrenner had the field read.

Unfortunately, there were two hiccups present, which ultimately proved to be the fund’s demise. As it often goes.

One, it was heavily, heavily concentrated in AI or AI-adjacent companiesSidenote: Companies with notoriously high beta, meaning that they move IN MULTIPLES compared to the market.In other words, when the Nasdaq-100 moved 1%, a company like this could move 3%, 5%, even upward of 10% in a single trading day. In both directions. End of sidenote. and two, it was massively leveraged, supposedly 3 to 4 times its own capital.

So while all was good and AI stocks were rising, the leverage amplified the gains, investors were happy, banks were content to roll the debt over, numbers were green. But in late June 2026 reckoning came-a-knockin’ and things turned sour.

Rapidly.

SOXX, the biggest semiconductor ETF, lost 29% in 26 sessions and the Nasdaq-100 fell about 10% in the same stretch, with investors apparently jittery about all the money flowing into AI themes and sufficient returns yet to materializeSidenote: Another thing happened while editing this article.Goldman Sachs published its analysis of how much in lease commitments AI hyperscalers supposedly hold off balance sheets.It is upward of 1 trillion USD. Yes, with a T.Let that sink in. End of sidenote.. Stocks dropped.

So, imagine that instead of a $100,000 exposure, where a 10% fall would cost you $10,000, you have a $400,000 position thanks to leverage. That same downward price move now costs you $40,000. That is 40% of your capital, on a move the unleveraged guy shrugged off.

This is, in very mild terms, what happened to Situational Awareness.

Leverage amplified its losses to the point where it actually had to sell parts of its portfolio to keep posting sufficient collateral for the banks not to withdraw its loans.

It’s a self-reinforcing spiral from here on.

Stock price starts falling -> leverage amplifies losses -> fund sells shares, piling further downside pressure on stock prices -> begets more selling -> leverage amplifies…

You see where this is going. Once the first domino fell, it was unstoppable. Aschenbrenner told his own investors it felt like a bank run and my guy wasn’t wrong.

In the beginning, Situational Awareness suffered because OTHERSSidenote: Interestingly, leverage played a role in that, too.For example, South Korean retail investors held MASSIVE amounts of 2x-3x semiconductor ETFs and products, composed mainly around Samsung and SK Hynix.They suffered a very similar fate to Situational Awareness. Most probably more painful in regard to personal finances, though.BTW: Korean retail traders amount to roughly 70% of daily trades in the country. That’s also why the ETF damage there was far worse, with KOSPI, the Korean stock index, falling even 8.95% on a single day End of sidenote. were selling, but IT quickly became the REASON why the selling continued, since unwinding its leveraged positions introduced more panic to the markets.

By that point, Aschenbrenner’s book had become guessable. Traders reverse-engineered what he and other leveraged players owned and then simply shorted those exact names. Not out of spite. Because they could see a forced seller coming miles ahead.

Boom. From +439% to +80% on the year. Assets from $45 billion to $10 billion.

That’s about as predatory as it gets, right?

Ehh, not really.

Think back to my metaphor about leaving the door open and then complaining about being burgled.

Look at what was targeted. It was not Aschenbrenner personally. If you’re leveraged three to four times, packed into correlated names and with lenders certain to call… well, put anyone in that seat and it ends the same way.

The hunt was aimed at a structure that’s already broken. It just happened to have a German-sounding name on it.

But no worries, nobody’s targeting your $4,000, $80,000 or $150,000 account on purpose, even though the mechanism is identical. OversizeSidenote: If you take one thing from this article, make it this one.Don’t oversize.Don’t.Oversize. End of sidenote., market moves, you become a forced seller.

Aschenbrenner had prime brokers on the phone. You get a push notification.

A fund comes to a fund’s rescue

In flies a savior on a griffon!

Oops, sorry, that’s just Ken Griffin from Citadel. My bad.

So as all the alarms are blaring, what does Situational Awareness do?

Simple. It sells itself.

Aschenbrenner allegedly reached out to multiple parties, with Citadel eventually offering the most acceptable terms. Hands were shaken and the market giant bought Awareness’ whole stock book. Reportedly at a circa $1.6 billion discount, though the exact number is unknown.

What happened the very next day after information of the deal leaked to the public? AI stocks staged an impressive rebound, with Nasdaq-100 adding 3.3% and SOXX itself jumping 8.5% in a single session.

But that’s just a bonus, because now we actually get to the part where all this is ultimately good for the markets.

See, when overleveraged players hold massive positions, their often inevitable unwind causes thundering market volatility and aforementioned self-reinforcing sell spirals. That is bad for everyone (at least everyone who is not short): institutions, retail traders, pension funds, your neighborhood crypto bro.

If you own a billion USD worth of stocks with just 200 million USD of your own capital, you don’t really own 80% of that package. So when the margin calls from your lenders come, you begin offloading, and, of course, you start with the “leveraged” parts.

The thing is, markets don’t really care where the money for the shares comes from, they see massive selling and they panic.

Selling begets selling.

Now, besides sometimes unrestrained greed, there’s no malicious intent hidden there and a LOT of market participants do it (get in debt to buy more assets). BUT, it gets dangerous when the borrowing stands on shaky ground, such as with Situational Awareness’ mind-boggling lack of diversification and foresight.

They borrowed a lot and they plunged it all into one sector. Very little, ultimately inefficient hedgingSidenote: To be precise, he was hedging by shorting some software names, including Adobe. End of sidenote.. And when that ship started taking on water… there was no life ring.

It happens more often than one would think.

The (in)visible hand that shakes the tree

So, from time to time, these volatility-inducing actors need to be culled.

That’s the “general maintenance” that companies like Citadel often do, and I think that is exactly what happened this time around.

But it’s not that straightforward.

Did I mention that before the final part of this massive AI sell-off commenced, Citadel published a note hinting at a possible Fed rate hike? The meeting was just two days away.

Timing, right?

This genuinely raises eyebrows and I won’t pretend otherwise, neither will I pretend to read minds. All I can do is check the tape, so let’s do that.

SOXX had been falling since late June. By the time the note landed, the drawdown was five weeks old and Aschenbrenner was already being shorted (he himself hinted at this in a letter to investors). His unraveling didn’t need a nudge.

Also, the call wasn’t completely off. Even though on 29 July the Fed held rates 9 to 3, those three dissented in favor of a hike.

Did the note accelerate the final leg of the sell-off? Almost certainly. When a firm Citadel’s size says anything, prices move.

The point is, Situational Awareness would have been liquidated regardless.

Personally, I don’t think it was abuse, but I get why people might see it that way. Maybe I’m just indoctrinated.

Also, this all happened 2 days before Leopold Aschenbrenner’s wedding.

Timing, right?

Not black and white, no sir

Is that a happy end?

Wouldn’t necessarily say so, at least not for Situational Awareness. But this is how the markets self-regulate and ultimately… it’s just healthy.

If you held AI stocks during this period (and did not panic sell), I bet you sighed a breath of relief once the market rebounded, right?

But, hey, maybe you didn’t. Maybe you nurse PTSD now, maybe you’ve quit trading and/or investing altogether. My condolences if that’s the case.

What happened, curtly: a lot of people’s book/portfolio was dragged down, in part, by a big player’s reckless actions. That sucks. Then came an even bigger player and unleashed his version of frontier justice. The original sinner got punished, panic deflated and the caravan resumed its journey.

Without some participants.

Unfortunate, but it happens in every crisis, be it big, small, tinySidenote: Contrary to the (over)reaction on the internet, this was a tiny one too, methinks. End of sidenote. or even imagined. During these late July/early August events I read through retail forums quite often, and there definitely was a lot of anger, angst and “I’m done with this shit”.

I’m probably gonna end this on a controversial note, but I think a lot of those negative emotions and consequences were self-inflicted. Not caused by market manipulation, which, I repeat, definitely exists.

It’s just… not the primary reason most retail traders lose money. Lack of proper risk management is. And the word proper does a lot of heavy lifting here.

Before you grab a pitchfork, now is a good time to think back to what I wrote about institutions in the first part.

They are better equipped to handle market panic. Designated survivors. The vast majority of legacy companies and funds have been through bigger turmoil, bigger than you and I can imagine.

I think that is the reason why, for many, it makes perfect sense to blame them. That, and our natural proclivity to see conspiracies everywhere. Boo!

In reality, most crises are caused not by manipulation, but by recklessness. When chips are down, that’s the one thing institutions and retailers have in common.

Dollar signs in our eyes blind us to the risk.

The distinction being that when you and I are reckless, we lose only our own money.

When institutions are, they lose theirs AND ours.

By the way, I’ve never heard anyone say “I’m not even trying my hand at trading, that shizzle is rigged top to bottom”.

Seems that people gain this conviction of manipulation only AFTER they lose money.

I wonder why.