Shares of Apple (AAPL) closed at 500 on Friday, Jan. 18. Not 499.99, not 500.01—five zero zero point zero zero dollars on the nose. There’s a long history of market watchers having cried conspiracy on Apple stock and for some observers, the impossibly round number was just too much of a coincidence. “I still have that bridge to sell you if you don’t think the fix was in on this,” wrote John Gruber an Apple über-blogger.
A Twitter chorus joined in:
• Proof of stock market manipulation
• If this doesn’t merit an SEC investigation then they should just close
• Can’t imagine all the crazy back-house trading and manipulation that must have occurred to have $AAPL land exactly at $500.00
• I’m reminded again why amateurs shouldn’t get involved in the financial markets
For some, the neat 500 close seemed all the more fishy for coming so soon after loosely sourced reports of weak demand for the iPhone 5, which sent shares of the company down to levels not seen since February 2012. At 500, the stock is down 28.8 percent from its September high.
Barry Ritholtz, chief executive of Fusion IQ and a Bloomberg contributor, felt obliged to address the rumors on his blog: “One emailer is an oddity, two a coincidence, three a full blown trend,” Ritholtz wrote in a post knocking down the conspiracy theories. The conspiracy folks and Ritholtz are both focused on the fact that Jan. 18 was an options expiration date, on which an especially huge number of puts and calls came due. Some see that as an incentive for trading collusion; Ritholtz explains that such pricing tendencies are to be expected.
Puts and calls are bets on whether a stock will rise or fall. They give the owner the right to transact on a certain date at a certain price, known as a strike price. Investors buy them as a form of wagering on the stock, and market makers buy them to hedge against positions they take on behalf of clients. Open interest—the sum of all outstanding options and futures contracts—is especially high on Apple, one of the most widely owned and traded stocks in the world. Because options can themselves be traded, their values are related to the underlying stock’s price; as an expiration date nears, a stock can seem magically attracted to a nice, round options price. The phenomenon has a name: options pinning. It has more to do with normal hedging behavior than illegal collusion.
“On option expiration days the nearest strike price works like a magnet for the price of the underlying asset,” Benjamin Golez, an assistant professor of finance at Notre Dame, wrote in an e-mail. “Since strike prices are round numbers (typically 5 or 10 apart), and equity options expire on the third Friday each month, pinning can thus help us understand why stocks on the third Friday of each month have a tendency to close near round numbers.”
“Many, many independent agents, acting completely independently, but with the same objective, have the effect of pushing the stock towards the strike,” says Mike Lipkin, an adjunct professor at Columbia University, who has researched options pinning (PDF) and who teaches the concept in his course on experimental finance. “Effectively, it’s a fight between the normal random motion of the stock and the effect of hedgers. They compete with each other.”
Take a look at the option chain data for Apple, for those bets expiring on Jan. 19. (Monthly options expire on the Saturday after the third Friday of the month.) There were more than 66,000 contracts at 500, more than twice as many as at any other price.
“People are correlative animals,” says Lipkin. “They tend to see things that are patterns. But what they don’t see are the probabilities.”
Suspicions of market-fixing are more often expressed when stocks lose value. People tend not to complain that the game is rigged when it’s making money for them. Golez notes that on Sept. 21, also an options expiration Friday, Apple closed at 700.095, near its all-time high. There were no claims of market manipulation.
Theories of diabolical market manipulation are tempting to believe. They have the benefit of simplicity, swapping the market’s spiderweb of countervailing forces for men in a smoke-filled room. Here’s an even simpler possibility: Investors are worried that Apple’s growth has finally slowed.