(Bloomberg News) Investors in three of the biggest Dow Jones Industrial Average stocks were whipsawed by price swings that repeated every hour yesterday, fueling speculation the moves were a consequence of computerized trading.
Shares of International Business Machines Corp., McDonald's Corp. and Coca-Cola Co. swung between successive lows and highs in intervals that began near the top and bottom of each hour, data compiled by Bloomberg show. While only IBM finished more than 1 percent higher, the intraday patterns weren't accompanied by any breaking news in the three companies where $3.42 billion worth of shares changed hands.
Regulators have increased scrutiny of computerized strategies that rose to prominence in the U.S. after more than a decade of market structure reform. The Securities and Exchange Commission and Commodity Futures Trading Commission blamed a broker's algorithm for setting into motion the events that caused the May 2010 market crash that briefly erased $862 billion from U.S. equities in less than 20 minutes.
"Somebody probably has software that's running an algorithm that's either selling in 30-minute intervals or buying," Bruce W. Weber, dean of the Alfred Lerner College of Business and Economics at the University of Delaware, said in a telephone interview. "For the market value of Coke to be going up and down in this way, oscillating every hour, is a pretty disconcerting observation. This is not going to raise investors' confidence in the mechanics of our market."
John Nester, a spokesman for the SEC, declined to comment on the trading, as did Kent Landers, a spokesman for Coca-Cola. Vineeta Durani of IBM didn't return a call and e-mail requesting comment. McDonald's didn't immediately make a representative available for comment.
"We're not aware of any issues," said Rich Adamonis, a spokesman for the New York Stock Exchange, where the companies are listed. "Nor were there any circuit breakers or other halts applied to those stocks. We didn't receive any complaints in our market. Everything was fine."
IBM fell 0.9 percent to $193.40 at 1:08 p.m. in New York today, while McDonald's slipped 1.2 percent to $91.62. Coca-Cola lost 0.8 percent to $76.91.
Algorithms are trading strategies that break larger buy or sell orders into smaller pieces over a specified period of time such as an hour or day. Traders at fund managers or brokers use the automated strategies to mute price impact and mask activity as they try to scoop up visible and hidden orders spread across exchanges and alternative venues such as dark pools.
A volume-weighted average price, or VWAP, strategy seeks to buy or sell stock over a certain period, weighted for the number of shares traded at different levels. A time-weighted average price algorithm tries to buy or sell over a set amount of time. More aggressive and tailored algorithms exist to fine-tune the behavior based on market conditions such as volume, volatility or the price movements of indexes.
Together, the three companies represented 14 percent of the value of trading in Dow stocks yesterday. IBM, which reported results July 18, made up 8.1 percent, with $2.03 billion changing hands, more than every stock in the index except Pfizer Inc., the data show. Yesterday had the highest value traded for the three stocks since March 16, when $3.52 billion changed hands, and it is almost twice the 2012 average of $1.96 billion.
"Every fundamentally oriented trader/investor is scratching their head," Nicholas Colas, the New York-based chief market strategist at ConvergEx Group, said in an e-mail. "These are high-dollar stocks, and major weightings, relatively speaking, in indexes such as the Dow and S&P 500."
About 10.4 million shares of IBM changed hands yesterday, twice the daily average of the past 12 months, data compiled by Bloomberg show. About 9.03 million shares of Coke changed hands, 25 percent more than the three-month average. The total number of shares traded in McDonald's yesterday was 7.43 million, 13 percent more than the three-month average, data compiled by Bloomberg show.
"Volume was significantly higher in most of those names yesterday, which combined with the exaggerated price moves would indicate that there were large orders placed in the algo," said Mark Turner, head of U.S. sales trading at New York-based Instinet Inc., which accounts for almost 5 percent of daily U.S. equities volume, said in an e-mail.