A temporary near-doubling in the PowerShares DB Commodity Short ETN (DDP)
On Friday, the underlying agricultural, energy, and industrial commodities in the PowerShares DB Commodity Short fell slightly while the publicly traded stock backed by the notes surged.
After opening at $36, the ETN, which trades on the New York Stock Exchange
Those trades -- which culminated in an intraday stock rise of over 90% -- were later cancelled by the NYSE.Bloomberg intraday trading data shows that some trades were executed at $46 shortly after 11 a.m., a near 30% rise from the ETN's Friday open. The PowerShares DB Commodity Short ETN closed Friday trading at $38.50, up 8.45% for the day.
The trades come just after a near-death software glitch hit Knight Capital
The surge in the ETN's shares came as the underling commodity assets gained slightly for the day, rising 1.11%, according to Bloomberg data. That 8%-plus rise in the ETN's stock versus the 1.1% rise in its underlying assets pushed the funds' premium to its assets to the highest in a year, the Bloomberg data show.
As it turns out, because the publicly traded ETN and its underlying asset are a zombie Wall Street financial product -- a sort-of stock market version of a collateralized debt obligation containing complex alchemy -- there is little reason to expect them trade in relation to each other, or to reality.
That would be fine if algorithmic trades, which were subsequently cancelled, didn't appear to manipulate the actual price of the ETN stock.
When asked about the abnormal trading and what looks to be roughly 10 cancelled trades, Katrina Clay, a NYSE spokesperson confirmed that the trades were cancelled under the exchange's "clearly erroneous execution" policy, but declined to give further information and instead sent over a copy of CEE rules. Invesco (IVZ)
Eric Scott Hunsader, the founder of Nanex, said on Friday that the cancelled trades clearly came from algorithmic trading programs
According to Wall Street Journal reporter Scott Patterson's history of high frequency trading Dark Pools, robotic traders oftentimes put in outrageously high and low bids for shares as a way to be the first to catch market price orders.
Part of the theory behind the trading strategy is that any actual execution at an absurd price ($70.54 in the case of PowerShares DB Commodity Short ETN on Friday or $100,000 for Apple) is likely to be cancelled by exchanges like NYSE.
The May 6, 2010 Apple and Accenture trades were subsequently cancelled, amid nearly 20,000 cancellations of trades that were 60% off market during the crash.
That's where Friday trading in a short commodity ETN raises eyebrows. Has a zombie wasteland of ETN products become the next profitable idea for algorithmic traders, as wildly distorted trades are cancelled by exchanges, while only mildly ridiculous ones stand?
The PowerShares short commodity ETN, issued by Deutsche Bank
In February, Deutsche Bank suspended the issuance of new shares in its PowerShares DB Commodity Short ETN and six other seven commodity-linked ETNs with a combined $40 million-plus in assets. Also in February, Credit Suisse Bank
Highlighted by Friday's trading, are algorithmic traders now feeding profits by manipulating a litter of broken Wall Street-issued ETN products? In the increasing frequency of major and minor flash crashes, it is still unclear who stands to win from the trading, as market volatility bruised the psyche of already scarred long-term investors. In the flash crash, Knight Capital's blowup and the BATS IPO debacle, many hugely discrepant trades stood, to the clear benefit of some.
If there is any solace in the mystery rise in the PowerShares DB Commodity Short ETN, it's that even though the index tracks highly watched commodity products like corn, crucial to Main Street America, the trading appears to be confined to the realm of Wall Street's darkest and opaque corners.
Still, if trading algorithms manipulate increasing distortions between closed ETN stocks and their underlying stocks, regulators like the Securities and Exchange Commission and exchanges like NYSE should explain why the practice stands.