Sunday, August 30, 2009

More on the Massive Trading Volumes in Troubled Financial Stocks



This story began for me with simple reader inquiries concerning a stock market indicator called TRIN and their perceptions that TRIN was "broken". For the uninitiated, TRIN assesses the proportion of stock exchange volume that is going to advancing stocks to the volume attributable to declining issues. When TRIN is below 1.0, it means that volume is relatively concentrated in rising shares; above 1.0 means that volume is concentrated in declining stocks.

TRIN appeared to be broken because we were getting huge swings in its values from moment to moment in the market. It would swing wildly, sometimes going far above 1.0 and sometimes far below. I pointed out that, from a purely mathematical vantage point, this could only occur if a disproportionate share of NYSE volume was occurring in one or a handful of stocks.

Further inquiry revealed that this was, indeed, the case: I found that, not only were the trading volumes of such stocks as C, AIG, FNM, and FRE elevated, as noted the by Big Picture blog, but that their composite volumes (their volumes traded across all exchanges) exceeded that of all other NYSE stock trading! Indeed, I discovered that the 20-day TRIN was at its lowest level since 2000 because volume was highly concentrated in rising stocks. This was not just unusually heavy volume; it was unusually heavy to the buy side.

Since this volume was directional--all of these stocks had made spectacular percentage gains--and because the highly unusual activity was unique to troubled financial firms (not stable companies such as GS and JPM), I surmised that something might be afoot: a systematic attempt to bolster the shares of taxpayer supported companies that--for political reasons--could not return to the bailout well. Why such an attempt? Perhaps to reimburse the largest shareholder of the institutions and position these companies to raise capital on their own. They certainly weren't going to raise their own capital as languishing two-dollar zombie stocks.

Of late, we've seen articles in the mainstream media suggesting that the volatility in these troubled financial companies' shares is attributable to short-covering. "When large numbers of short sellers close their positions by buying shares at the same time, the stocks involved can register explosive - and often inexplicable - gains," the Financial Times article explains.

On the surface, this makes sense. The S.E.C. has been toying with the idea of reinstated curbs on short selling, and this could spark short covering among financial firms. Indeed, according to the ShortSqueeze site, C, AIG, FNM, and FRE have large short positions as of the most recent report, amounting to approximately 11%, 20%, 6%, and 10% of their total floats respectively.

Once we look at the magnitude of the recent activity in these stocks, however, the idea that this rise is largely a function of short covering becomes implausible. As we see with Citigroup (C) stock (top chart) and AIG, FNM, and FRE (bottom chart), the August trading volume alone has exceeded the total floats of these companies--and certainly their total short interests--by factors of 4 or more. While short covering no doubt has contributed to the rise in these shares, traders and investors could have covered every single short position and still not accounted for the lion's share of recent activity in the stocks.

We also hear the idea from the mainstream media that some of the huge volumes in these stocks can be attributed to "daytraders". This conjures images of young guys in proprietary trading shops churning trades all day long. I know or work with a number of the largest discretionary prop firms in the country and am aware of none with the capitalization to pull off trading volumes of this magnitude. It boggles the imagination that, suddenly in August, daytraders across the country began trading volumes of shares in excess of total NYSE volume. Again, I have no doubt that daytraders have been playing these stocks and contributing to their rally; I just cannot see them as primary drivers of such activity.

The fact that the August trading volumes in C, AIG, FNM, and FRE far exceed their total floats also suggests that individual large buyers of these companies are not driving their rise. To achieve volumes of this staggering magnitude, some kind of churning of shares must be occurring--not just block purchases over time. The only kind of trading technology I know of that is capable of such churning is high frequency, algorithmic trading. This was also the recent conclusion of Zero Hedge. Firms engaging in such strategies, including some of the largest investment banks, do indeed have the capital to trade such volumes.

Of course, these high frequency trading programs are supposed to be market making only, not drivers of directional market moves. As a federal prosecutor noted when there was an alleged theft of some of these programs, however, such technology can "manipulate markets in unfair ways".

Are these bailout beneficiaries now enjoying the fruits of market manipulations? I don't know the answer to that, but I find it interesting that none of the principals of the firms appears to care. According to a recent article, the chair of Freddie Mac indicated that he had "no idea" what these trading volumes were all about. The article also noted that, "Representatives for Fannie, the SEC, AIG, FINRA and the NYSE declined to comment. Spokeswomen for Treasury, which owns most of AIG, and the Federal Housing Finance Agency, which holds Fannie and Freddie in conservatorship, also wouldn't comment."

Somehow I think if the tables were turned and huge volumes were being executed on the *short* side to drop the share values of these companies, we would hear a renewed hue and cry about manipulated markets and the need to curb rapacious short sellers. When there is unprecedented volume lifting the shares of seemingly worthless companies in a manner that could only be accomplished by the directional programming of trading systems, company officials and financial regulators appear to be silent lambs.

I don't have answers to many of these puzzling observations; I do recognize good questions worthy of inquiry. If we're not getting comment from authorities and the firms themselves, where is the investigative financial press? Bland assurances that we're merely seeing heightened short covering and daytrading activity simply don't pass muster.

I will be tracking this story during the week ahead; follow my tweets for updates.

Disclosure: I do not hold long or short positions in any of the above mentioned stocks and have not held positions in any of them during 2008 or 2009.
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23 comments:

Jim said...

Massively great posting, Dr Brett.

Yelnick agrees and sees an end to this nonsense at http://yelnick.typepad.com/yelnick/

Jim said...

Just saw the post about your birthday... Hope you have a Wonderful Day!!! Thanks for all you do for so many.
Jim

jadenizm said...

"I know or work with a number of the largest discretionary prop firms in the country and am aware of none with the capitalization to pull off trading volumes of this magnitude."

Perhaps you should consider some of the prop firms outside of the country. I'm sure mine alone did several hundred million. I know one guy, not even at my firm who traded 10 million of C, and i'm sure he's not unique.

michaelD said...

it sure seems as if the answer might be a very simple one ... there is anecdotal evidence that targeted short-squeezes are running individual, beaten-down equities higher. liquidity and leverage-backed traders look for low-priced issues with higher short interest and then squeeze the heck out of it ... that could easily ignite the rally. that would logically be followed up by HFT algo's swapping shares back and forth at a furious rate. finally, we have the POMO dollars that could be directed against these things. combine all three and you have the potential for a crazy panic-buying storm which is exactly what we've been witnessing. so --

1- intentional short-squeeze lights the fire

2- momentum draws the gentle attentions of HAL, WOPR and M5 which is then amplified by them

3 - POMO dollars are directed at these issues which gets even more attention from the HFTs, amplifying buying even more

somehow i really don't think this is the idea behind the notion of 'price discovery'.

Mark Wolfinger said...

This is an extremely important blog post.

The idea that markets can be manipulated higher is ignored while short sellers get crucified when stocks decline.

A system built on that morality cannot survive.

Bryan said...

What a fascinating story this is turning out to be. Thank you for your insight.

Ariel said...

Kudos for a disciplined approach to the question and to finding answers - thanks Dr. Brett!

Tahoe said...

as always, insightful and debate provoking. Love your work. And a happy BDay to you .... enjoy!

I am continually convinced of the power of polar opposites and karma. it has an appearance of lopsidedness , but I wonder if it really is or just has that appearance, or is that just the perspective we see? is there another? IDK. Great work!

fiki said...

An interesting post as always. Still these stocks are rising and so is the market. I use to be very bearish at the start of this rally blaming GS and manipulation for the rise in price and my bad shorts. The point is: the market is manipulated and always has been (just consider flash trading aka front running). The rules of the game are made by the biggest players and the government. But without them there would be no market. So if we choose to participate all we can do is try to be one of those 10% that actually make money.

Analyzing why the market is going up doesn’t help. It keeps you from acting on what the market is doing. Right now these stocks are going up and the volume is extremely heavy. It doesn’t matter if we think it’s short covering, day traders or program traders. We just don’t know.

C is up from the low of 0,97 a massive +539% (5,23). Still just a year ago it made a ATH 55,01. That’s a 90,5% drop. It has 2340 % to go. Considering all the negative media attention and that the media isn’t in the business of supplying us with correct information but so sell as much advertising as possible and therefore writes what it expects the reader wants to read we can assume there is a very big bearish crowd out there that’s either short or in cash. The higher the stock sours the more will start thinking about the upside potential in the future and thereby fuelling the rally.

Is it crazy thinking that these stocks are worth more than 1 dollar? Perhaps. Still the Washington post had an article just the other day “Banks to big to fail have grown even bigger” stating that these banks thanks to government sponsoring have strengthen their market position and given them a greater control over consumer lending. JP holds more than 1$ of every 10$ on deposits in the US. So does BAC. Wells Fargo is now the biggest West Coast Bank and C issue 1 of every 2 mortgages and about 2 of every 3 credit cards in the country! So if one believes we’ve seen the bottom and that the financial panic is over 2,35 for a C is a bargain. Just imagine if the stock manages to hit a 50% retracement in 2-5 years. That’s a 1000% profit. Off course if it goes bust you loose your 2,35.

PThoreson69 said...

First, happy birthday!

Second, thanks for taking up this issue and giving it some press. I am taken aback by the fact that when you remove the government owned shares of these companies (or do you?) from those being traded, you are left with a very small segment of the float being traded a ridiculous number of times.
And, as you mentioned, if this activity were causing the share price to decline you can bet the SEC would want an explanation yesterday regarding this highly unusual volume.

Kos said...

Altucher himself was on tv last week stating that his quant firm is trading these firms because they have room to give. That last desperate effort to grab profits when at a Bear market top.

Armin Stuk said...

Massive trading volumes in troubled financial stocks should result to equally massive comments from authorities and the firms themselves.
So far, provided little of either.

meques said...

thanks for such exhaustive observation. couldnt imagine that TRIN-story can have such long tail.

lately i have asked Karl Denninger, the author of the video about TRIN failure, occurred at the end of july current year, that i have mentioned in comments to one of your previous post. He confirmed the same - "game-playing in AIG and similar stocks that is causing it".

Still im trying to get what we have in common with 30 july incident with TRIN and current situation.

And of course im impatiently waiting to see what will be with TRIN on monday, how long can story continue.

Ticker Street said...

The stats on the short squeeze site are old. The new ones come out only when NASDAQ reveals them on a 15 day basis. So, the short squeeze site shows nothing new.

OKL said...

Bullish Case:

- Capitulation; the bottom is in for these stocks; they cannot go lower, we have the govt to save them

(Add your green shoots theory)

Bearish Case;

- Garbage stocks rallying; makes you wonder what kind of fellow in his right mind would buy these stocks; dumb money are all over themselves

(Add your bailout/fiscal deficit theory)

Comment:

AIG LEH FNM FRE C CIT

- These are the companies that brought the markets to their knees last year and their psychological effect cannot be underestimated;

i.e., if these companies get the positive impression in the public that they are recovering and doing well, it could spark another wave of buying.

Steveo said...

Great post.
The sad parts are this--
The economy and the political system are broken. Corruption and manipulation are rewarded, and innovation in product, services, and product production are not rewarded appropriately since the spoils have been sucked up by the corruption and manipulation.

The other sad part is that people "accept" this as part of the process, in the same way that "spin" is accepted as a "legitimate" form of communication.

adan said...

that a person of brett's stature is now focussed on the question regarding the trading volumnes of such few firms that, yet, seem to be able to drive the market in ways that, to me, seem totally unlike the type of capitalism our country supposedly supports, i begin to breathe a sigh of hope...

i am also grateful that a person like mark wolfinger has posted a positive note regarding brett's efforts -

these are all things i truly hope mean there is a chance, there is a turning for the better toward truth and honesty, and there is a chance i can make an honest buck in this market ;-)

Ed61 said...

~ Thursday, one commentator on CNBC highlighted the average trade size in AIG was 230 shares which makes for a strong argument that daytraders are indeed extremely active in these shares, - and I was one taking part with around 20,000 on the day over 15 trades or so.

Brett Steenbarger, Ph.D. said...

Thanks for the interest and excellent comments. Ed61, I would argue that the small size of the average trade in AIG has more of the footprint of high frequency algos breaking up their executions than daytrading prop guys, who would tend to put on larger positions and not churn so much--

Brett

Fernando Alvarez said...

jadenizm....would you mind sharing which firm that is? TIA

Gui said...

This is a desperate action to give psychological value to these companies - much more than market value. The government knows a correction is coming soon after this 50% rally. How investors would look at penny stocks like C and AIG during the correction ahead? Now they are going to to change short sell rules and we'll have to swallow AIG as a 50 buck stock (maybe 30).

Allen Mass said...

Thanks for the interest and excellent comments.I read & enjoyed.

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