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Flash Crashers Ready to Feast on Corn: Street Whispers

NEW YORK ( TheStreet) -- A temporary near-doubling in the PowerShares DB Commodity Short ETN (DDP) last week signaled that robotic trading programs are targeting complicated stock products tied to agricultural commodities -- like corn -- amid a nationwide drought.

On Friday, the underlying agricultural, energy and industrial commodities in the PowerShares DB Commodity Short rose 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 (NYX), the Cincinnati Stock Exchange and a host of high frequency exchanges like BATS and Direct Edge, surged to $55, then $60, and even rising above $70 briefly, in a string of algorithmic trades orchestrated in thirty second intervals between 10:53 a.m. and 10:58, according to data provided by Nanex.

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 (KCG - Get Report) in August and the initial public offering failure of high frequency exchange BATS Global Markets (BATS) in March highlighted how a new breed of algorithmic traders has wreaked havoc on stock markets.

The surge in the ETN's shares occurred as the underling commodity assets gained only 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 (IVN), the owner of PowerShares, declined to comment through a media representative at BC Capital Partners.

Eric Scott Hunsader, the founder of Nanex, said on Friday that the cancelled trades clearly came from algorithmic trading programs [robots]. While Hunsader supported the notion that such wild price swings usually lead to cancelled trades, he initially took to Twitter on Friday morning to question the near doubling of the ETN's shares, and still is uncertain how so many trades in neat 30 second intervals could go so wrong.
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SYM TRADE IT LAST %CHG
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NYX $0.00 0.00%
TVIX $16.98 13.73%
DB $28.31 -3.25%
KCG $11.08 0.54%

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