Wall Street shaken by late-day market surges

By Herbert Lash

NEW YORK (Reuters) - Wall Street is getting hit by massive trading volume late in the day, and whether it's program-driven or covering bets that went the wrong way, expect more.

U.S. stock prices jumped in the last half hour of trading on both Wednesday and Thursday, surprising traders as major market indexes had traded up and down through most of the two sessions.

The late surges have surprised traders, who don't see a catalyst for the jump. The gains may falsely indicate in easing in investor skittishness over a tightening of credit, when in fact concerns may still abound.

"It has a lot of equity traders scratching their heads wondering what the prompt for this has been. I don't think there was anything on the tape that warranted it," said Michael James, senior trader at investment bank Wedbush Morgan in Los Angeles.

Trading in exchange-traded funds, primarily those that are linked to the benchmark Standard & Poor's 500 Index .SPX, is behind the late-session moves, said James. The ETFs, formerly Standard & Poor's Depositary Receipts, are called spiders.

Volume in SPDR 500 ETFs .SPY set a record on Wednesday, according to Reuters data, with about 467.7 million shares traded, more than double July's daily average of about 189.9 million shares. Volume on Thursday was about 295 million, having steadily risen in recent months.

"For whatever reason, someone wants to cover a big short position in the spiders in the last hour yesterday and today," James said late Thursday. "It's not an accident."

He and other traders said the late-day rally suggested investors had bet the market would move lower. But when prices moved up, they were forced to buy shares to replace ones they had borrowed, a move known as short-covering.

Sudden and massive stock moves occur because more traders can easily place orders in the marketplace than in the past, said Adam Sussman, a senior analyst at Tabb Group, a research and advisory firm for financial markets.

Hedge funds and mutual funds have more control over their order flow than they did five years ago because of electronic trading, said Sussman.

"If they want to flood the market at the end of the day, they can, and it doesn't require them to call someone up and have a conversation" with a broker, he said.

Electronic trading includes systems based on algorithms, complex mathematical formulas that quickly assess a large number of possible trades and execute orders in milliseconds.

Wednesday's big move -- the Dow Jones industrial average .DJI climbed 180 points in the last 20 minutes of the session -- sparked talk a bad trade in the futures market was behind the unexpected rally.

The Chicago Board Options Exchange and the CME Group reported no price corrections and spokeswomen at both exchanges said there was no cancellation of an erroneous trade.

"Yesterday's rumor was obviously that somebody had oversold an S&P futures position and had to cover," Ted Oberhaus, manager of equity trading at Lord Abbett & Co., said on Thursday.