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Wall Street shaken by late-day market surges

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.

Peter Tuchman, a trader on the floor of the New York Stock Exchange, reacts after the closing bell July 16, 2007. 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. REUTERS/Jamie Fine

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.

A meltdown in the subprime mortgage market has caused credit to tighten and led some investors to expect a bigger fallout than has occurred.

“We’ve been beaten down with this subprime and there’s nothing that came down today. That’s why we rallied back,” Todd Leone, head of listed trading at Cowen & Co. in New York, said on Thursday.

Options trading on the CBOE was heavy in S&P 500 index contracts on Wednesday and Thursday, with volume almost 50 percent higher than the daily average of 645,868 contracts in July, the exchange said.

The ratio of put options to call options was about 2 to 1. The buyer of puts hopes prices will fall. Investors and traders like options because they are easily bought and sold and because they provide diversification at a limited cost.

Electronic trading is quick but can add roller-coaster-like movements in share prices, especially just after the market’s open and during the last hour of trade.

“It’s great for fast executions but it’s not great for good execution. Someday people who asked for this are going to wonder why they asked,” said Victor Pugliese, director of listed equity trading at First Albany Corp. in San Francisco.