Wednesday, July 15, 2009

Guest Post: High Frequency Trading Alert - AIG

Submitted By Joe Saluzzi of Themis Trading

There has been a lot of talk over the past few weeks about high frequency trading. We have argued that the volume these high frequency traders are creating is not beneficial to the market. Lets take a closer look at what a high frequency favorite stock looks like. The poster boy for HFT this week is none other than 80% U.S. government owned, AIG. AIG recently underwent a 1 for 20 reverse split since the “issuer” wanted to make their stock look more attractive to institutional clients. You would have expected volume in this stock to be reduced by 20x. Instead, volume has remained at a consistent pre split level of 75 million shares/day. How could this be? Did something change to attract more institutional buyers? Did the black hole of AIG liabilities somehow close? No, the answer here is that the High Frequency traders found a new stock to play in.

How do we know that AIG is a HFT darling? We look for three prime characteristics: high volume, a quick early morning ramp in the stock and then a constant bid throughout the rest of the day that will hold the stock at the top of the ramp. To graphically view this, look at the July 13th intraday chart of AIG.

Volume exploded in the morning and the stock ramped to $14. This level was now the “point”. The HFT’s defended this level all day (and collected liquidity rebates for this privilege). Throughout the day there were mini spikes higher that allowed the HFT’s to sell at a higher price all the stock they had been accumulating at the $14 level (again, they collected a liquidity rebate from their exchange/ecn “partners” for this privilege). What caused these mini-spikes throughout the day? It seems now that the HFT’s have attracted a new partner – the day trader. They now have caught onto the game and realize they can “leech” off the back of the HFT and make a small profit during the mini spikes (

Going forward, we will begin noting these HFT situations and start posting them to our blog regularly.

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