HFT Firms Likely Losers in Avon as Takeover Filing Jacks Shares

Think a high-frequency trading shop made a mint on the surge in Avon Products Inc. today? Not so fast.

Shares of the beauty products maker shot up beginning around 11:35 a.m. after a takeover offer was filed that the company is now treating as a hoax. Twenty times as many shares as usual changed hands in 25 minutes as the stock went from $6.60 to $8. But HFT firms were unlikely to be on the winning side, said Peter Nabicht, a former senior adviser to the Modern Markets Initiative, a high-frequency trade group.

“Market makers make a lot of money when the market goes up and there’s a lot of back and forth,” said Nabicht, who is also the former chief technology officer at Chicago-based high-frequency trader Allston Trading LLC. “But when it goes up hard, a lot of market makers puke out of it.”

The U.S. Securities and Exchange Commission enforcement division is reviewing the legitimacy of the buyout offer, a person with knowledge of the matter told Bloomberg. A filing with the SEC indicated that a private-equity firm named PTG Capital Partners Ltd. made a bid to buy Avon, but the cosmetics company said it never received an offer.

Market makers use the advantage of lightning-quick trading and risk management to buy and sell securities and derivatives while markets are open, and normally don’t hold positions overnight. The strategy can be wildly successful. HFT firm Virtu Financial Inc. said in February that it’s had only one losing day in its six years of operation.

Surge, Plunge

But the Avon surge and plunge wasn’t something programmers plan for and anyone fast enough to buy on the filing wouldn’t have been in the money for long.

As of 11:35 a.m., the stock was at $6.60, treading water in the 17-cent range where it had spent the previous two hours. In the next 60 seconds, 600,000 shares changed hands in more than 1,200 separate trades as Avon began a rally that would lift it 21 percent to $8 despite three separate volatility halts.

The shares closed 12 percent below the high at $7.07.

“Normally, when you’re on the right end of trades like this, if there’s not something legitimate going on, you try to sell and capture those profits,” said Skip Aylesworth, a portfolio manager at Hennessy Funds in Boston, where he helps oversee about $5 billion. “I wouldn’t be surprised if part of the volume is people saying ‘thank you very much, Avon,’ and moving on.”

While high-frequency traders have a reputation as the market’s savviest operators, recent events have shown they are not infallible. Navinder Singh Sarao, the U.K. trader accused of contributing to the flash crash, was portrayed by U.S. regulators as filing thousands of futures orders to deceive computerized market makers at the Chicago Mercantile Exchange.

Putting false takeover plans or placing false orders are two sides of the same coin, said Craig Pirrong, a finance professor at the University of Houston.

“These are the kinds of things that can hurt” HFT firms, he said.

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