Sounds familiar huh? A near certainty of a bankruptcy yet the common equity of CIT trades over $1. There once was a day when bankruptcy rumors would send a stock spiraling immediately into penny status. But recently, we’ve seen more than a few bankrupt names trade above $1 for quite some time (closed at $0.98 but trade over $1 for most of the day). Joe Saluzzi thinks he knows why:
CIT had some awful news out this morning. The stock was halted right after the opening and once reopened it tanked almost 50%. But then a magical thing happened, the stock traded back to $1 from a low of $0.75. What is so magical about $1? Any stock that trades under $1 is not eligible for a liquidty rebate from the exchanges/ecn’s. The cost to trade sub $1 stocks is FREE but you don’t get the rebate. But if the stock gets over $1, the the liquidity rebates which could be as high as $.003/share kick in. So, it appears that the high frequency traders will be desperate to keep this stock above $1 today so they can keep collecting those rebates. There is no fundamental valuation for $1, it is simply a matter of high frequency economics.
I don’t know how true these allegations are, but this is 100% manipulation if it’s the case. You have to wonder when, if ever, the SEC will start looking into the HFT rumors….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.