Another reason BAC is not on my investment radar

Why Bank of America is the new Citigroup

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 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.
Comment: Trading and investing are not the same thing! An investor looks for the fundamentals and buys and holds to reap the rewards. A better bank investment would be US Bank. The above image is not my trading desk!

1 comment:

  1. The Real Reason Behind Bank of America's Rally:

    The economy is hanging on a thread that relies almost entirely upon European leaders hammering out their differences, and most Europe experts continue to believe a lasting solution to the crisis is years away and will be incredibly painful. As long as the market continues to forget that, Bank of America will be the best-performing financial stock. As soon as it comes back to its senses, Bank of America will plummet. It's that simple.


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