It hits all the right notes. After a great run for the last several weeks, Bank of America stock is still only $8 apiece — very affordable per share, making it a highly liquid stock. About 4 billion shares change hands on the New York Stock Exchange daily, and 300 to 400 million of those are BAC shares. That’s almost one out of 10. It’s also a highly speculative stock, with sentiment moving things more than fundamentals — and sentiment changes by the second in this mixed up market.
The result? On good days, Bank of America stock soars faster than other banks, and often higher than any other stock on Wall Street. On bad days when euro zone debts hang over the market like a dark storm cloud, BAC drops like a stone.
It’s not just day traders and speculators, however. It’s also robots trading Bank of America.
An Associated Press report writes that, “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 AP story goes on to say, “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.”
In high-frequency trading, computer algorithms automatically trade shares based on price movement. If a computer sees Bank of America ready to pop, it can buy shares a fraction of a second faster than the rest of the market and book a tiny profit. A penny here and there across millions of shares and millions of trades… well, you can see why BAC is so popular.
Or in the words of the Associated Press, “Buying leads to more buying, selling to more selling.”
It’s been a good ride for BAC stock in 2012. Bank of America is up almost 45% on the year. But it was down over 55% last year, so things can change fast.
Investors must be wary of this trend if they want to dabble in Bank of America stock.