RAC - Charts & Price Action, page-20006

Something that may interest some....

It's time to dig into something a bit whack. Service Stream (SSM) was a stock once plagued by bots and algorithms – Until it smashed earnings expectations on 22 February and went on an 11-day win streak.

The stock traded sideways from July 2023 till February 2024, in a relatively tight price range between the mid 80 cent level and mid 90 cent level.

I guess the first question is – How do you know there’s an algorithm? Here are some of my key observations:

• Consistent volume – Between December 2023 and February 2024 the stock traded within a narrow range and averaged around 500-600,000 volume every single day
• The order book – But if you go into the order book, there’s only offers and bids of 20-30,000 shares
• Put the above together – So 500,000 volume but bids and offers of only 20-30,000. That implies you need such bids and offers to be wiped out 15-30 times over
• What happens on repeat – If a buyer(s) take out the 94 cent order of 20,000 shares (which pushes the share price up from 93.5-94 to 94-94.5) the 94 line gets refreshed by the algorithm
• In essence – The company might be fundamentally sound and undervalued but there’s a persistent seller at several price points with a boatload of shares

Naturally, the next question is – Why is there an algorithm and who is it?

Picture this, you’re a fund that holds 115 million SSM shares (~20% of the company) and you want to offload this stake. If you tried to sell everything in one go – You’d nuke the share price.

You're not in a hurry to sell and you can’t find another party that’s interested in buying your stake (or a portion of it). So here you are – Drip feeding the market with a few hundred thousand shares a day.

By the way, the above numbers are real – Allan Gray Australia owned 114.8 million shares as of 27 October 2023 and reduced its position to 107.7 million shares by 29 February 2024.

I guess the last thing is – Can I profit from this?

Before I say ‘yes’ – I should probably say that past performance is no guarantee of future returns. Trading the SSM range would have worked for many months – Buying around 85-87 cents and selling at 90-92 cents. The main limitations would be:

• Managing risk – Between July 2023 and February 2024, the stock slipped below the 85 cent level on ~12 occasions. Where would you position your stop loss?
• Liquidity – There was a prolonged period where daily average volume was only ~500,000 shares. You can’t size up too hard.
• Edge – Imagine if this was common knowledge and everybody was trading SSM. It would probably break something