PMT Shares Shoot Up 10% in One Minute, Trades Canceled
January 8, 2013
The Nasdaq Stock Market said Tuesday it was canceling trades in a mortgage management firm, after its shares shot up 10% in one minute.
The exchange canceled all trades at or above $28.23 a share, after it investigated potentially erroneous transactions involving the PennyMac Mortgage Investment Trust (PMT) executed between 10:39 and 10:40 a.m. Eastern time.
In less than a minute, the stock of the trust, a part of the Private National Mortgage Acceptance Company, jumped from $26 a share to $29.50, according to Nanex, a market data aggregator in Winnetka, Ill. Its high for the day, according to an end of day quote at a Nasdaq site: $29.62.
PMT's high: $29.62.
PMT shares stayed at the highest level for a second, then returned to where it started, one second later.
On any transaction where the price in that period was executed at or above $28.23, “the trade was busted,” said Nanex founder Eric Hunsader.
According to its own Rule 11890(b), there are a number of factors Nasdaq may weigh in determining whether a trade is clearly erroneous. These include:
• Material news released for the security
• Suspicious trading activity
• System malfunctions or disruptions
• Volume and volatility for the security
In this instance, it was likely volatility factor that Nasdaq used to cancel PMT trading. Hunsader said he believes that one algorithmically driven- trade set off a chain reaction, with other algos feeding off the momentum and jumping in to up the price of shares by a penny or two with each trade. In all, there were about 250 separate high frequency trades in that minute.
Nanex said today:
“Some of the more nefarious algos run tests by rapidly placing and canceling orders in a way to fool other algorithms into showing themselves, to freak humans out, or in this case to artificially create stub quotes. Stub quotes, a significant cause of bad fills during the Flash Crash, were banned by the SEC. Well, here's one way an algo can appear to meet Stub Quote requirements, but back-off the market in a way that all the benefits of stub quotes remain intact. Here's an example of prices changing by 10% in another stock on the same day.''
For eleven minutes on January 3, stock market data feeds for securities listed on the Nasdaq Stock Market shut down, as Nasdaq investigated what it termed “stale data” in a message to customers.
Nasdaq spokesman Robert Madden declined to comment on either incident.
