Why Bank of America is the new Citigroup
On a normal day, 4 billion shares of stock change hands on the New York Stock Exchange. One in 10 belongs to #46 Ryan Torain Red Embroidered jersey a single company. It's not McDonald's or IBM, both of which have been on a tear.
It's Bank of America — bailed out by the government three years ago, reviled for being part of the mortgage frenzy that helped wreck the economy and selling for not much more than an ATM fee.
When the market goes up because of positive news about the economy, Bank of America stock shoots up past the stocks of other big banks. When traders get worried about Greek debt, Bank of America takes the biggest plunge.
The big swings are not driven by a fundamental bet that the bank will be more profitable because the economy is getting better or a real concern that it will lose more money than others if there is a default in Greece.
Instead, Bank of America is the stock of the moment for high-frequency trading, the supercomputer-driven buying and selling that barely existed a few years ago and now accounts for as much as two-thirds of U.S. trading.
The bank's single-digit stock price and flood of shares on the market — three times as many as its nearest big-bank competitor — make it an attractive target for hedge funds and banks that employ high-powered, computerized trading.
"The movement of Bank of America stock on most days has nothing to do with Bank of America," says Joseph Saluzzi, co-founder of brokerage firm Themis Trading.
In other words, the stock moves because it moves. Bank of America stock has risen or fallen 1 percent or more on 20 days this year. The Standard & Poor's 500 index has only done it three times.
For the year, Bank of America is up 46 percent, best of the 30 stocks that make up the Dow Jones industrial average. Big banks collectively are up 15 percent.
In high-frequency trading, investors use computer algorithms to exploit small changes in a stock's price. If a computer can seize on a stock like Bank of America a fraction of Redskins #23 DeAngelo Hall White jersey a second faster than the rest of the market, it can book a tiny profit.
Those pennies add up over tens of millions of shares a day to produce big gains. And when computers rush to buy or sell a stock like Bank of America, it can result in accelerated moves in the stock price. Buying leads to more buying, selling to more selling.
Bank of America is part of the Standard & Poor's 500, and therefore held in mutual funds in the retirement accounts of millions of Americans. And mutual fund managers hate high-frequency trading.
Not only does it make the stocks in their portfolios more volatile, but fund managers fume that high-frequency computers can detect their stock orders, step in to change the price of a stock slightly and pocket a small profit.
"It has nothing to do with the fundamentals," says Leon Cooperman, a billionaire investor, chairman of hedge fund Omega Advisors and former CEO of Goldman Sachs Asset Management.
For computers to move in and out quickly, there must be enough shares available to trade. Bank of America has a truckload — 10.5 billion shares outstanding, compared with 3.8 billion for JPMorgan Chase and 2.9 billion for Citigroup.
The stock traded as high Boston Red Sox #9 Ted Williams jersey as $15.31 last year. Then investors, worried about how deep the bank's mortgage problems might be, drove it below $10 in July. High-frequency traders pounced, and Bank of America's volume exploded. It was 147 million shares last summer. On Thursday, 477 million shares changed hands.
The low price put it in the sweet spot for high-frequency trading. If a high-frequency operation is trading blocks of 100 shares at a time to capitalize on a 1-cent change, there's a lot less risk working with a $5 stock than a $500 one.
It makes Bank of America "a juicy trade at very little risk," says Adam Sussman, director of research at Tabb Group, a markets advisory firm.
In 2009 and 2010, Citigroup, then part-owned by the government, was in the same spot. Its price was in single digits, and it seesawed day to day. It was often the highest-volume stock — as many as 500 million shares changing hands in one day.
Last year, Citi reduced the number of shares by exchanging one share for every 10. That brought its stock price up — $33 on Wednesday — and high-frequency traders stopped flocking to it. Volume on a normal day has dropped to 50 million.
Bank of America went the opposite way in November and December and sold 400 million more shares to the market to raise $3.5 billion and improve its financial stability.
Today, some investors — the human ones — are buying Bank of America because they like CEO Brian Moynihan's efforts to shore up the company's finances. Other investors won't touch it because they are afraid of the billions Bank of America is still spending to fight mortgage lawsuits. Charles Bobrinskoy, director of Atlanta Braves #3 RUTH Cream jersey research at Ariel Investments, even calls the company "unanalyzable."
