Investing Caffeine

Making +457,425,000% – 13 Minutes at a Time

May 7, 2010 at 1:56 am 2 comments

I love investing, but sometimes the shear boredom can get a little tiresome. I mean, a puny little -500 point collapse in the Dow Jones Industrial Average every five minutes can be so 1987.  Thank goodness for yesterday’s largest, intra-day point-drop in history (almost 1,000 points) because without out such a meltdown, I might fall asleep at the trading desk and there would be no way to make an annualized +457,425,000% (~457 million percent) trade in a single day. Earning a well-deserved return like that will not only exceed the rates achieved on T-Bills, but will also likely outpace inflation as well. Making that kind of money is not bad work, if you can get it.

Executing the Tricky Trade

Sound difficult to do? Well, not really. All you need to do is find a stock or security that has fallen more than 99% in a single day, then buy the security for 10 cents per share and then sell it immediately, minutes later at $61.09. Repeat this process another 390 times per day for 52 weeks, and you’re well on your way of turning $1 into $4.5 million over a year.

IWD Chart (Source: Yahoo! Finance)

Take for example, the iShares Russell 1000 Value Exchange Traded Fund (ETF), IWD, which yesterday traded for pennies at 3:47 p.m. Eastern Standard Time (EST) and skyrocketed over +600x fold in the subsequent 13 minutes. Fortunately (or unfortunately), depending on how you perceive the situation, the irregular trading activity was not limited to IWD.  Other securities showing severe abnormal trading patterns include,  Accenture (ACN), Boston Beer (SAM), Exelon (EXC), CenterPoint Energy (CNP), Eagle Material (EXP), Genpact Ltd (G), ITC Holdings (ITC), Brown & Brown (BRO), and Casey’s General (CASY). In full disclosure, I did not take advantage of any 99% pullbacks yesterday, but now that I know how the game works, I will be on full alert.

What the F*%$# Happened?

Initially reports pointed to a Citigroup (C) trader who entered into an inadvertent $16 billion (with a “b”) E-Mini futures trade order, when the trader meant to enter a trade for $16 million (with an “m”)…ooops! This alleged transaction purportedly triggered a wave of selling, culminating in a select group of stocks temporarily trading down to pennies in value. There is a related, yet more plausible, potential explanation. Quite possibly, as a function of excessive trading volume overwhelming the New York Stock Exchange, the overflow of trades migrated to less liquid ECNs (Electronic Communication Networks) and over-the-counter markets. Chances are the high frequency traders were not blindly jumping in front of the train. Whom really got screwed were the retail investors that had stop loss orders at “market” prices, which likely were triggered at unattractive prices.

I’m not sure if we will ever find out what truly happened, but whatever explanations are provided, rest assured there will be multiple more conspiracy theories on top of the legitimate guesses. The top 5 conspiracies I’m pushing are the following:

1)      Frustrated by the fraud charges filed by the SEC (Securities and Exchange Commission), Goldman Sachs intentionally tripped over a power cord at the New York Stock Exchange (NYSE), which triggered a wave of bogus trades.

2)      High Frequency Traders (see HFT Article) were upgrading their computers from Windows Vista to Windows 7 and experienced an outage causing global disruption.

3)      In order to pay for the potential upcoming lawsuit liabilities and SEC fines, Goldman shorted the Dow Jones Industrial index at 10,800 and then went long once the index broke 10,000.

4)      Warren Buffett was rumored to suffer a heart attack, but after realizing belching relieved his chest pain, the markets recovered dramatically.

5)      Worried that regulatory reform may not pass, a secret group of Congressmen shorted stocks (see Do As I Say, Not As I Do article) to push stocks lower, then distributed TARP (Troubled Asset Relief Program) assets to voters minutes later in order to buy November votes and push stock prices higher.

Political Aftermath

Click To Hear Senators

Politicians will be frothing at the mouth or be pressured into approving financial reform. Even if markets manage to stabilize in the coming days and weeks, the pressure to ram regulatory reform through Capitol Hill will be mind-numbing. Mary Shapiro, Chairman of the SEC, and politicians will also be pushing to produce a clear scapegoat to throw under the bus, whether it is a trader at Citi, a high frequency traders at Goldman Sachs, the CEO at the NYSE (Duncan Niederauer), or a talking baby from the E-TRADE commercials. Regardless, depending on how quickly a credible explanation is unearthed, we will know how much, if any, reform is needed. If the markets are genuinely transparent, following the paper trail of responsibility to the stocks that dropped to $.00 or $.01 a share should be a piece of cake. If the systems are too complex to explain why handfuls of stocks are trading to $0, then even I am willing to look up to the skies and say heaven help us with some tighter oversight.

Over the last few years, there have been very few dull, financial moments and the markets did very little to disappoint yesterday. Irrespective of the political mudslinging, scapegoating, or irresponsible behavior, the SEC needs to get to the bottom of these issues rapidly in order to protect the integrity and trust of global players in our markets. What we don’t need is a political knee-jerk reaction that merely creates unintended, negative consequences. No matter what happens, I will at least be equipped to test a new strategy designed to make +457,425,000%.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in GS, IWD, C, BRKA/B, CNP, EXP, G, ITC, BRO, and CASY, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Trading. Tags: bogus trades, Citigroup, ECNs, HFT, High frequency trading, NYSE, regulatory reform, SEC, Shapiro, Trading.