This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Flash Crashers Ready to Feast on Corn: Street Whispers

Stocks in this article: NYX KCG DB DDP TVIX

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.

The practice, called 'stub trading,' was seen to be the reason that Apple's (AAPL) stock briefly rose to $100,000 a share during the 2010 flash crash, while Accenture (ACN) fell to a penny.

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 (DB), was created in mid-2008 amid a boom in the product to offer investors unique leverage and risk-reward characteristics compared with ETF's or other index products. After Wall Street nearly came unraveled and regulators subsequently overhauled the financial system, the products - at risk to the collapse of an issuing bank -- became less attractive to investors and less profitable for banks.

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 (CS) suspended the issuance of new shares in its VelocityShares Daily 2x VIX Short-Term ETN (TVIX). After suspending new ETN share issuance, Deutsche Bank, Credit Suisse and many other bank issuers warn that stock prices of an ETN versus underlying assets may vary widely, creating either a premium or discount.

For instance, while the PowerShares DB Commodity Short ETN trades at a significant premium to its assets, its sister Double Short ETN also suspended on Feb 9 trades at a near 20% discount.

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 assets, regulators like the Securities and Exchange Commission and exchanges like NYSE should explain why the practice stands.

-- Written by Antoine Gara in New York

2 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs