On a typical day, 4 billion shares of stock are exchanged on the NYSE. Recently, Bank of America (NYSE: BAC) has been targeted by high-frequency traders. With high-frequency trading, investors use computer algorithms to capture value from small changes in a company’s stock price. If a computer can seize on a stock fractions of a second quicker than the market, it can book small profits. These small profits can add up quickly and produce big gains to investors.
BAC’s share price has been negatively affected in the recent years due to the mortgage crisis and bailout by the U.S. government. Lately, BAC has risen or fallen 1% or more on numerous days. For the year, BAC is up over 40% while other banks are only up 15%. However, BAC’s increase in share price and swings may not be the result of a bet that the bank will be more profitable in the future or the economy is turning around. It is speculated that BAC’s rise and swings are a result of high-frequency trading. Investors like BAC because it has a single-digit stock price and there are a flood of shares on the market, which is good for high-frequency trading.
High-frequency trading only started a few years ago, but is now believed to account for as much as two-thirds of U.S. trading. Analyst point to high-frequency trading for the large daily swings in the broader markets in 2010 and 2011. High-frequency trading received some attention on May 6, 2010, where the market had a “flash crash”. The DOW recovered from a 1,000 point decline within minutes to only close down 348 points.