With Trading Light, 5 Stocks a Rally Makes, The Wall Street Journal, August 28, 2009

Article Summary: Two major stock indexes, the Dow Jones Industrial Average and the S&P 500, are up more than 40% from their lows in mid-March, highlighting what might be a rally in the stock market. However, a combination of low trading volume and soaring interest in a small group of stocks by short-term investors — some of them using high-frequency trading strategies — has created a market where what you see is not necessarily what you get. Under these conditions, the market value of stocks can have little to do with the performance or prospects of the underlying companies.

ITG’s Perspective: As this article points out, the influence of high-frequency trading (HFT) on the market is undeniable. High-frequency traders serve as de facto market makers for a small percentage of the 5000+ U.S. listed equities. This explains much of the surge in trading activity for a handful of financial stocks, which reflects a sharp divergence from the overall decline in US equity trading volumes over the first half of this year.

ITG’s core customer base is institutional investors. As such, we don’t have a horse in the HFT race. But we continue to pay close attention to this large and influential segment of the market. As the August slowdown comes to an end, it will be interesting to see what September brings…