Investors Punished by Never Ending Flash Crashes
NEW YORK (TheStreet) -- On November 29, 2012 shares in a security linked to satellite operator Iridium Communications(IRDMU) rose about 14,000% after set of trades in the $14 stock spiked to roughly $2000 on Nasdaq(NDAQ) .
That obviously flawed stock quote -- along with similar big price swings in NYSE-traded ETF's like the SPDR Barclays Convertible Securities(CWB) and the Direxion Daily Mid Cap Bull(MIDU) , RLJ Lodging Trust(RLJ) , Kraft Foods(KRFT) and Enstar Group(ESGR) -- are among thousands of examples of high frequency traders violating post-Flash Crash regulations, according to Eric Scott Hunsader, the founder of Nanex, a market data provider.
The same destabilizing trading behavior is seen in big name, high volume stocks like Google(GOOG) , when volatility created by unexpected news events moves shares in a Flash Crash-like manner, Hunsader says. He often highlights those trades on Twitter and Nanex's web site.
One culprit is the so-called 'stub quote,' a sort of placeholder trade that can also test the price of a stock without committing money. The problem is stub quotes were banned by the Securities and Exchange Commission after the 2010 "Flash Crash but - according to Hunsader and other stock market watchers - they continue to cause wild stock swings.
According to the SEC's definition, a stub quote is "an offer to buy or sell a stock at a price so far away from the prevailing market that it is not intended to be executed, such as an order to buy at a penny or an offer to sell at $100,000."