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American Capital Plunges 11% as Millions of Shares Trade

Aug. 7 (Bloomberg) -- American Capital Agency Corp., a real-estate investment trust, plunged the most in 10 months at today’s open as millions of shares traded before the stock recovered about two-thirds of the loss.

About 6.5 million shares of the company changed hands in the first three minutes following the open of exchanges at 9:30 a.m. New York time today, more than the stock has traded on average in a full day this year, according to data compiled by Bloomberg.

Shares of the Bethesda, Maryland-based company slid to their lowest price of the day one minute after the open, plunging 11 percent to $30.30 in five trades totaling 524 shares executed on the Nasdaq Stock Market and venues off exchanges, according to data compiled by Bloomberg. By 9:32 a.m., the shares had rebounded 6.4 percent from the day’s low to $32.25. They closed at $32.96, down 3.3 percent on the day.

Rapid declines at the open have sometimes been caused by a block of orders that triggered a series of stop losses, according to Michael Widner, an analyst at Stifel Nicolaus & Co. Stop losses are orders to sell when a stock’s value falls to a specified price.

“We’ve seen cascading stop losses happen half a dozen times in the sector over the past couple years,” Baltimore-based Widner wrote in an e-mail today.

Mortgage Bonds

The drop in American Capital, which invests in government-backed mortgage bonds, followed data released yesterday that showed a jump in prepayments on low-coupon 30-year mortgage securities that represent its largest holdings without refinancing protection. Those bonds also declined today with Treasuries amid better-than-estimated corporate earnings.

“It’s not that big of a position and those securities are expected to speed up over time in a low-rate environment,” Gary Kain, American Capital’s president, said today in a telephone interview. The REIT is about 70 percent invested in debt with refinancing protection that is “performing great” and it’s hedging more than ever in the past against falling bond prices, he said.

The sudden drop in American Capital comes a week after trading in dozens of companies went haywire in the first minutes of the session on Aug. 1. That episode was later traced to a computer malfunction at one of the country’s biggest market-making firms that spewed orders by mistake.

“It feels a lot like last Wednesday’s action,” said Larry Peruzzi, senior equity trader at Cabrera Capital Markets LLC in Boston. “Something is going on.”

Annaly Capital Management Inc., the largest real estate investment trust that buys mortgage debt, fell as much as 3.3 percent to $16.25 in the first half hour of trading. The shares trimmed losses to close down 1 percent at $16.64 on volume of 29 million shares, almost triple the daily average this year.

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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