tries to cite trading in the biotech company Dendreon (DNDN) to highlight the dangers high-frequency trading poses to the average investors.
On April 28, the stock plunged $24 to $7.50 in the span of 70 seconds, and one retail trader, who had a stop-loss of $20 ended up selling at $15, because the trading was so fast.
Watson forfeited $18,000 in unrealized gains and absorbed a $1,500 loss. Now that may not sound like a lot. But it’s a bitter pill to swallow when you consider that Dendreon shares quickly rebounded from their pre-crash level after the company reported generally positive test results and trading resumed.
And Watson is not alone. A similar thing happened to Brett Burdick and anecdotally to many other retail investors who had placed stop-loss orders with their brokers on shares of Dendreon.
There has been speculation that short sellers, traders who look to profit from the stock’s plunge, spread a rumour that Dendreon was going to report poor test results for its cancer-fighting drug. Others theorize that a broker incorrectly typed in an outsized sell order, which panicked others in the market.
But no matter what the precipitated the sell-off, it’s likely that high-frequency trading magnified it-given that these automated trading programs control more than half of the daily stock trading in the United States.
Blaming HFT for this story doesn’t make sense. Goldstein already cites two reasonable culrprits: rumour-mongers or fat-fingered traders. One’s illegal and one’s unfortunate, but for whatever reason, the market reacted very violently to both of those, and there’s no evidence, at least in his telling, that HFT magnified it. There just isn’t.
First of all, we don’t know that HFT is heavy in DNDN. He says it accounts for half of daily stock trading, but supposedly the HFT volume is insane for stocks like Citi (C), so we’re guessing it’s not nearly half for many other companies, like a $24 biotech. Beyond that, just because you have a stop-loss at $20, doesn’t mean you have the right to sell it at that in a panic if nobody’s bidding at that price. And since the stock was headed to $7 (albeit briefly), why would anyone bid $20? He was lucky he got $15 (Although, of course, ultimately unlucky).
The bottom line is that there was a panic, and 70 seconds is plenty of time for the floor to collapse, even without robots. Think about this: If actual bad news had hit the market, would we be blaming HFT for such fast selling? No.
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