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Tokyo Arbitrage Funds Lift Short Positions to Record, Risking Squeeze

Keiko Ujikane and Toshiro Hasegawa

(Bloomberg) -- Arbitrage traders have built an unprecedented amount of bearish positions on Japanese shares, which could signal increased volatility ahead.

Net short cash positions related to arbitrage trading reached 1.4 trillion yen ($13 billion) on Aug. 23, the highest on record, according to the Tokyo Stock Exchange. Its data tracks arbitrageurs who seek to profit from the difference in pricing between domestic stock indexes and the futures and options derived from them. For almost all of the last 25 years, they have held net long exposure.

The size and direction of the positioning raises the risk of a short squeeze in Japanese stocks, should the funds seek to close their trades.

“I’ve never seen the situation that short arbitrage positions are larger than long arbitrage positions for such a long period,” said Yutaka Miura, a senior technical analyst at Mizuho Securities Co. “It’s really unusual.”

The possibility some of the positions could be liquidated at the next SQ day on Sept. 13 -- the “special quotation” day for marking the settlement price of futures and options -- could prompt some speculative buying in the market in advance, he added.

Japanese stocks have had a rocky 2019, buffeted by the escalating U.S.-China trade war, a stronger yen and concern over the country’s upcoming sales-tax hike. The benchmark Topix Index is barely in the green for the year, up about 1% versus a 12% gain in the MSCI All-Country World Index.

“Investors are worried that the risk and uncertainties over the impact of the U.S.-China trade disputes on the global economy have heightened considerably,” said Seiichi Suzuki, a market analyst at Tokai Tokyo Research Institute in Tokyo. However, “it’s not realistic that selling will continue as we’ve seen.”

--With assistance from Min Jeong Lee.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net;Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Cormac Mullen, Tom Redmond

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