Saturday, May 8, 2010

High-Frequency Traders Were Short LAST WEEK

CNBC casually mentions that some hedge funds and high-frequency traders were heavily shorting certain stocks LAST WEEK, betting on the imminent decline in the stock market. It reports these funds were doubling down on SHORTS this week.

Well, "decline" was an understatement, wasn't it?

Smart Money Betting More Downside To Come (5/7/2010 CNBC)

"Chatter suggests some hedge funds may have seen this plunge coming and got short last week. So what are they doing now?

"Before we get to that, we first wanted to make sure there was substance behind the chatter.

"And analysis from seems to confirm that there is, in fact, a great deal of substance.

" is a company that finds stocks in the marketplace that hedge funds and high frequency traders are looking to short.

And CEO John Tabacco tells us last Thursday the number of requests to locate stocks to short jumped 50% above the normal 60-day average; with top requests listed below:

Most Requested Stocks To Short Last Week
Bank of America
Frontier Financial
Source: John Tabacco, Locatestock
"So what's the smart money doing now?

"With the market turning negative for the year on Friday, you'd think the smart money would be covering. But they're not.

"”Now, they’re doubling down and shorting more,” says Tabacco, “with financials the most shorted again.”

"You read that right. Despite the sharp declines this week the smart money is getting shorter.

"”Our analytics suggests there’s a big event out there and there could be more downside,” says Tabacco." [Emphasis is mine. The article continues.]

To call them "smart money" annoys me, unless "smart" means "devilishly crooked". Thursday's market near-meltdown may well have been caused by those hedge funds and investment banks using high-frequency trading. They were shorting big LAST WEEK.

This is no trading, not even betting. They go short on stocks or indices, and they CAUSE the breakdown. A guaranteed, huge profit. This is swindle; from the non-HFT institutional traders and investors who (used to) supply real liquidity to the market, and from the general public who invest and trade in the financial markets.

As to the stocks in question, this is how they fared in one week:
Ambac (ABK): $1.51 (April 30) to $1.38 (May 7), 8.6% drop
Citigroup (C): $4.37 to $4.00, 8.5% drop
Bank of America (BAC): $17.83 to $16.18, 9.3% drop
MBIA (MBI): $9.58 to $8.73, 8.9% drop
Frontier Financial (FTBK): $3.57 as of April 30, but the firm declared bankruptcy on May 3. Good luck closing the short trade during bankruptcy, algos.
During the same period,
Dow Jones Industrial: 11,009 to 10,380, 5.7% drop
S&P 500: 1,187 to 1,111, 6.4% drop
Nasdaq: 2,461 to 2,266, 7.9% drop
Russell 2000: 716 to 653, 8.9% drop
Dow Jones US Financials Index: 291 to 270, 7.2% drop
Tech, small/mid cap, and financials were hit hard.

Just about the only thing that not only held but increased in price during the mayhem was gold:
Gold continuous contract: $1,179 to $1,208, 2.5% increase
We the hapless small investors and traders have few choices to protect what is left in our portfolio against these high-frequency trading raiders. Either you join them in shorts and probably get burned when they flip to massively long in a millisecond, or just buy gold and/or gold miners' stocks and sit on it. (This is no investment advice, do your own due diligence.)

Just be aware that paper golds (gold ETFs and ETNs, straight or leveraged) are heavily held by some of the largest institutional investors and speculators (George Soros, John Paulson, to name a few), which means they may not be as safe as they portray themselves to be.

There is actually a third choice: sell out the positions and sit on the pile (big or small) of cash. But then, there is this thing called the government, who wants to grab whatever they can -new taxes, fees - to feed itself. On top of that, it can cause (the central bank attached to the government actually wants to cause) inflation, taking away the purchasing power of the money further.

"Between a rock and a hard place" is another understatement.


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