Tuesday, November 24, 2009

High Frequency Trading Valuation of Worthless Fannie Mae: At Least a $1!

Joe Saluzzi, Themis Trading
What is it about FNM and the $1 handle? It has traded in the $1.01-$1.02 range on 16mm shares since last Thursday. And since November 2nd, FNM has traded between $1.00 and $1.07 on over 400 million shares. What is it about the $1 mark? Why doesn’t FNM go below $1 when most analysis that we have seen conclude that the company is worthless. Sure it is true that bankrupt companies like LEHMQ and MTLQQ still trade as some investors use them as lottery tickets, but these stocks trade way below $1. There are a few possibilities here:
1) A buyer (or more than a few buyers) are desperate to own this ward of the state and refuse to pay anything less than $1 for it . This is not a likely scenario.
2) Someone is buying the stock and simultaneously trading options against it (possible but not likely).
3) High frequency traders are buying and selling the stock with each other as they collect liquidity rebates from the exchanges and ecn’s. They collect as much as $0.0032 per share per side. If you trade the stock flat and collect a rebate on both sides, then your return is 0.6% each time. Do that 1000 times a day and it starts to add up. Sure beats collecting 0.26% for a 1 year t-bill.
So, even if you agree with us about this, you may ask what is so special about the $1 price? Well, any stock that trades less than $1 does not qualify for a liquidity rebate. So, what we have here is trading for rebates.

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