Category Archives: pre-market

‘Wash Trades’ Scrutinized. Why Now?

According to a March 18, 2013 Wall Street Journal article titled “'Wash Trades' Scrutinized; Issue Is Whether High-Speed Firms Illegally Buy, Sell Futures in Same Deals,” “U.S. regulators are investigating whether high-frequency traders are routinely distorting stock and futures markets by illegally acting as buyer and seller in the same transactions, according to people familiar with the probes.” (found here)

We’re not sure what really prompted this action, however, the New Low Observer has been tracking these issue for a very long time (since 2008).  In an August 2009 article titled "After Hour Conundrum" (found here), we said the following:

"My suspicion is that institution(s) are accumulating short/long positions as the price of the stock rises during the regular hours. Once the market closes, the same institution sell/buy the shares to/from themselves or a related party. Additionally, options for the stock could have been purchased, sold or written in anticipation of the expected change in price after-hours."

An activity that has been going on since 2008 and was easily identifiable begs the question, Why now?  We’ve become inured to the claims that regulators are going to take action on issues that are deemed illegal, especially when said illegal activity is so widespread.

We have extensive records of wash trades from 2008 to the present.  The playground for such illegal activity is in the pre-market and after hour markets.  Our February 2013 article titled  “Investors Pay Big for Loss Protection” (found here) said the following:

“At some point, there will be a mass of pre/post market participants that will cause a stampede for the narrowest exits on a much broader scale that will put into the question whether what remains of the current system actually works.”

In the past, we’ve asked that regulators address this fraudulent activity before it is too late.  However, when regulators actually start to get involved it usually too late. Let’s see how this plays out.

Note: A partial depository of after hour shenanigans is highlighted in the link below:

Gaming the Pre/After Hour Markets

Investors Pay Big for Loss Protection

There is one issue that we believe undermines the fabric and credibility of the stock market and it will darken everyone's door some day. That issue is the murkiness of pre & after-hour trading and their impact on risk control tools like stop loss orders. Currently, these extra hours of trading do not trigger stop-loss orders. As a result, this creates an uneven playing field for those with the access and those without the access to pre/post market trading.  The impact of an uneven playing field in after-hours will ultimately be the undoing of the market in general.

However, before going into specific details, it needs to be said that standing stop-loss orders are very simple. An investor wishing to avoid significant loss can instruct their broker to automatically place a market order to sell their stock when the stock falls to a specified price (the opposite applies to short sellers). As the stock hits the indicated level on the way down (on the way up for short sellers), the stock automatically becomes a market order and is sold at the best available price. Normally, this procedure is done automatically once the shareholder provides these instructions to their broker.

While the process seems pretty simple, any investor who thinks that having stop-loss orders is a rational way to limit losses (or protect profits) are paying through the nose for the most recent lesson from Mr. Market. 

The latest lesson is with Verifone Systems (PAY).  After the market closed on February 20, 2013, Verifone announced that it would miss Q1 and Q2 targets (found here). At the close of trading on February 20, 2013, PAY was at $31.89.  Unfortunately, in after-hours trading, PAY declined -32.55% on trading volume of 4,783,086 shares.

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Then, in pre-market trading volume of 2,263,950 shares, PAY fell an additional -5% to the opening price of $19.97, a total decline of -37.28% from the close of market on February 20th to the open on February 21st.

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A total of 7,047,036 shares were traded in the combined post/pre-market trading resulting in the decline of PAY to the tune of –37.28%. During the regular hours of trading, the total volume of shares traded was 50,411,282 as the stock closed the day at $18.24.

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What needs to be understood is that roughly 12% of the shares traded caused PAY to decline –37% while 88% of the shares traded caused PAY to decline only –8%.  This is the equivalent of an 11-story building weighing more than the 102-story Empire State Building.

According to the NYSE Euronext website (found here):

“NYSE and NYSE Amex are the only equities markets that offer a rich combination of cutting edge, ultrafast technology with the volatility buffer of human judgment and accountability to create orderly opens and closes, lower volatility, deeper liquidity and improved prices.”

These are bold claims for NYSE Euronext to make when 12% of trades are allowed to increase volatility, decrease liquidity and destroy prices.  It is probable that NYSE Euronext will say that it doesn’t happen enough to warrant any changes.  However, investors will discount the after-hours by piling their trades into this narrow window between conventional hours of trading.  This is setting the markets up for the opposite of what the NYSE Euronext and other exchange operators claim to provide market participants.

Questions That Need Answers

  • Is it necessary to have the minority of traders affect the majority of the movement in the stock price while stop loss orders aren’t allowed?
  • If an investor has a sitting stop-loss order at a "reasonable" level, like $30 or lower, does it make sense that their shares automatically sell at the February 21st opening price of $19.97? 
  • Can the investor be given the option, when the stock falls more than -10% in pre/post trading, as to whether they wish to commit to their initial order during “regular” hours?
  • Should we get rid of pre/post trading hours?
  • Is the current system adequate?

We believe that market regulators need to answer these questions before the situation really, really gets out of control.   For now it only affects individual holders of the wrong stocks at the wrong time, which seems to be a little too frequently, of late.  At some point, there will be a mass of pre/post market participants that will cause a stampede for the narrowest exits on a much broader scale that will put into the question whether what remains of the current system actually works.

Until the time comes when the above questions are answered and changes are implemented, the next stock market crash will be born in the pre/after-hour markets with flash crash characteristics if this issue isn’t addressed. We recommend that investors avoid using stop-loss orders as a means of protection against downside risk or seriously consider making use of pre/after-hour market trading platforms.

AIG Trading Notes

Today, AIG traded up a whopping 20.46% on volume of 101,064,355 shares. On the surface of it this seems like a resounding vote of confidence for a company that is 80% owned by U.S. taxpayers. However, beneath the surface lies a murky story waiting to be told.

The story waiting to come out is that on Thurday August 6, 2009, AIG had a closing price of $22.53. During "Pre-market" trading Friday August 7th, AIG went from $22.53 to $27.37, a gain of 21.48%. The volume of shares traded during the "Pre-market" was 5,785,607 (after hour thumbnail.)

Once the regular hours of trading began on Friday August 7, 2009 the price of AIG actually fell from the $27.37 pre-market level to finally close at $27.14. Again, the regular hours of trading volume was 101,064,355.

What does all this mean? Over 5 million shares moved the price from $22.53 to $27.37. Once the regular market opened the public battled it out to come to the conclusion that the $27.37 wasn't the right price. Over 100 million only impacted the price by $0.23 lower than what 5 million was able to do by increasing the price over 20%.

My conclusion is that the public has less confidence in the future prospects for this company, and possibly the stock market, than the pre-market participants would have us believe. I also noticed that in after-hours trading the price rose an additional $0.08 on volume of 244,363 shares. Ain't it funny, 244,363 shares can raise the stock $0.08 while 100 million results in a loss of $0.23. The pre-market and after-market traders are gaming the system.

It appears that if you want to be a "trader" then you need to be entering and exiting the market before or after regular market hours. Otherwise, I would be cautious about dealing in this stock and any other stocks that are so easily managed based on so few participants. Conversely, if you're a "long term" investor then be ready to sell on a moments notice using market orders only. If you use a stop order to sell at the price of $27 then it is likely that you could get stopped out at $24 instead of $26.99 or thereabout if the stock trades down in the pre-market on Monday (wouldn't be surprised if this happens.) Touc.

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After-Hour Conundrum

The first after-hour profile is Applied Material (AMAT). In the screen shot below we see that AMAT has a market capitalization of $18.3 billion. During market hours on August 5th, we see that the stock traded down by 1.51% or $0.21. Over the last 3 months, AMAT has had average daily volume of 21 million shares.

In the screen shot below, we see that in after-hour trading AMAT traded up by exactly $0.21 bringing the price right back to where it started in the beginning of the day. Notice that during the after-hour trading it took only 160,000 shares to offset 12,303,994 shares traded during regular hours. Also notice that four trades equaled 73% of the total after-hour volume.
What I'd like to know is this, who is holding 48,252 worth of AMAT shares valued at $663,465? Why does anyone who owns so many shares try to sell them at a time when they wouldn't likely get the best price available? Who is matching up these trades?
Next up is Cognizant Technology Solutions (CTSH). Below we see that CTSH traded up by $0.99 on trading volume of 9,503,064. However, during after-hour session we can see that CTSH trades back down by $0.99. It only took 99,202 shares to get the price exactly back to where it started earlier in the day.
Again, notice that someone with 43,700 shares worth $1,468,966 decided that after-hours was the best time to unload the shares. Not to be outdone, someone else with 32,400 shares valued at $1,109,768 feels like getting rid of their shares.

Conclusion

From my experience routing trades to the floor of the NYSE in the mid-90's, these transactions are suspect. After all, who would try to unload so many shares without disrupting the market price. In the case of Cognizant Solutions, the 43,700 shares sold was 44% of all after-hour trading. such a large proportion of trading volume would normally spike the price up or down dramatically. Strangely, there was someone willing to obtain the odd number of shares after-hours. This is a highly unusual transaction for so many shares at a time when the market is so illiquid. In fact, most of the After Hours Activity that I have posted show similar patterns.
My suspicion is that institution(s) are accumulating short/long positions as the price of the stock rises during the regular hours. Once the market closes, the same institution sell/buy the shares to/from themselves or a related party. Additionally, options for the stock could have been purchased, sold or written in anticipation of the expected change in price after-hours. This is definitely something that is worth investigating further to determine how these transactions are being carried out. Not to mention the fact that the shares are rising and falling by exactly the opposite amount that took place during regular market hours.
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