Accidental trades blamed for volatility

STOCKTAKE:A SO-CALLED "fat finger" mistake was suspected to have caused some crazed late-day trading in oil last week.

Accidental trades are not new but they cause more volatility these days, with algorithms reacting and creating a cascade effect. High-frequency trading (HFT) has been blamed for 2010’s “flash crash”, when indices plunged 9 per cent before quickly recovering, as well as last month’s trading chaos after a “technology breakdown” at Knight Capital.

A new study by the Chicago Federal Reserve has found out-of-control algorithms were more common than anticipated. Furthermore, applying risk controls before the start of a trade can slow down an order, and HFT firms are often under “enormous pressure” to execute trades immediately. HFT accounts for over 70 per cent of trading in the US and Britain.

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Shorting United a dangerous game

SHORT-SELLERS are upping their bets against Manchester United. Data from British firm Markit shows that almost 11 per cent of United shares are in the hands of shorts, triple levels seen in the average SP 500 company.

Shares fell below their $14 offering price within days of United’s flotation last month, and slipped to $12.40 following last week’s annual results. One understands the shorts’ rationale. The stock looks expensive, as this column noted recently. But short interest stood at 8.4 per cent a month ago, Markit noted at the time, and the supply of shares available for shorting was already “getting pretty tight”. The 14th most-shorted global IPO of the past year, the extent of short interest means the potential for a short squeeze – when “good” news causes wrong-footed shorts to buy back the shares, fuelling price rises – exists. Facebook, the fourth-most shorted IPO, is up over 30 per cent over the past three weeks, with short covering likely contributing to the gains.

Einhorn’s views get a reaction

FEW short-sellers are as feared as David Einhorn, as the Wall Street Journal revealed last week. Recently, shares in nutrition firm Herbalife fell by 20 per cent in one day after Einhorn, famous for betting against Lehman Brothers in 2007, questioned its sales practices. The Journal examined the performance of nine stocks after they were mentioned in a negative light by Einhorn. They suffered median one-day falls of 4.9 per cent, and were 13 per cent lower 30 days later.

Financial crisis still scars investors

US investors appear unaware that the S&P 500 has more than doubled since March 2009. Franklin Templeton’s annual investor surveys show that 66 per cent believed the market fell in 2009, 48 per cent in 2010 and 53 per cent in 2011. In reality, the index gained 26 per cent, 15 per cent and 2 per cent in those years, and is now near all-time highs.

Clearly, the 2008-09 financial crisis and the weak economic recovery have scarred investors. However, studies show little if any link between economic growth and stock returns. The current cyclical bull is just the latest example of that reality.

Hedge funds had little role in crisis

A NEW report finds that while hedge funds are often “vilified as terrible actors”, they had little role in the global financial crisis. The Rand Corporation report, Hedge Funds and Systemic Risk, says hedge funds “called attention to the cracks in the system” by betting against bank stocks and subprime mortgages.

However, hedge funds helped “destabilise” the financial system by withdrawing billions of dollars from investment banks in 2008. In addition, the collapse of the Long Term Capital Management hedge fund in 1998 illustrates the risk they pose to the financial system. Despite regulatory reforms, the potential remains for hedge funds to build “highly leveraged and illiquid portfolios”.