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UPDATE 2-Fannie, Freddie soar on opportunistic day traders

 * Fannie Mae, Freddie Mac shares rise early, then settle
 * Day traders 'playing until the game stops'
 (New throughout, adds byline)
 NEW YORK, Aug 25 (Reuters) - Day traders helped drive up
the price and volume of Fannie Mae FNM.N and Freddie Mac
FRE.N shares for a second consecutive day on Tuesday, looking
to turn a quick profit and spurred by the prospect of
collecting rebates on the low-priced household names.
 The shares of the U.S. government-controlled mortgage
lenders jumped early and closed only moderately higher for a
fourth straight day, despite no material news. Two-day trading
volume in Fannie and Freddie was the highest in several
months.
 The pattern was more pronounced on Monday, suggesting day
traders were piling in after each other to seize on a trend
that may not last long, traders and observers said.
 "A lot of guys are playing until the game stops. The shares
have been opening up every morning and there's kind of a
pattern to that," said Scott Dreyer, managing partner at
boutique broker-dealer Compass Point Research & Trading, which
specializes in financial stocks.
 Fannie rose as much as 24 percent, while Freddie gained as
much as 14 percent in morning trading. They closed up 9.4
percent at $1.86 and up 0.5 percent at $2.06, respectively.
 "They're gapping open every morning just on the overnight
news that the world is getting better," Dreyer said. "For the
day traders, this goes back to the way they used to trade the
tech stocks -- buying them in the evenings and selling them
after they gap open."
 The "gap" is the difference between a stock's closing and
opening price.
 Day traders and other firms, including high-frequency
traders, will also post standing orders in active stocks,
hoping to collect the rebate when that bid or offer is filled.
 Exchanges and other trading venues rebate those who add
liquidity and charge those who take liquidity under the
"maker-taker" pricing scheme, first introduced more than a
decade ago. [ID:nN24319128].
 CHEAP, ATTRACTIVE STOCKS
 The U.S. government seized Fannie and Freddie last
September after they reported huge losses caused by plummeting
U.S. house prices.
 Although both hard-hit companies were essentially
nationalized to prevent them from going under, Fannie shares
have more than doubled since starting the year at 76 cents.
Freddie has almost tripled in value from 73 cents.
 "You can get these massive spikes in these low-dollar
companies that are structurally in a lot of trouble," said Ryan
Detrick, senior technical strategist at Schaeffer's Investment
Research.
 Cheaper stocks require a far smaller capital commitment
from active traders than expensive shares such as Google Inc
GOOG.O, trading at more than $400 on the Nasdaq.
 This month, Citigroup Inc C.N, Fannie and Freddie were
three of the four most active stocks on the New York Stock
Exchange. Each were less than $5 a share on Tuesday.
[ID:nN25213947]
 RISING TIDE?
 The shares of other financial companies, such as Citigroup
and insurers American International Group Inc AIG.N and
Hartford Financial Services Group Inc HIG.N also have risen
dramatically in recent weeks.
 For better or for worse, then, some investors see the
mortgage lenders following the rebound of the banking sector.
 "If the recession has actually ended and the economy is
bouncing back, these investors would hope and believe that
Freddie Mac and Fannie Mae will make a similar move as these
others," said William Lefkowitz, option strategist at brokerage
firm vFinance Investments.
 Joe Kinahan, chief derivatives strategist at Thinkorswim
Group, a division of TD Ameritrade Holding Corp, said some
investors may see an improving outlook for the mortgage giants
thanks to an economic rebound and government intervention.
 "The only rumor I have heard is that the government may
extend or increase the time frame for the government's first-
time home buyer tax credit, which is supposed to expire this
fall. If that happens, that would be great for Fannie and
Freddie," he said.
 Options markets were also very active on Tuesday. During
the first 45 minutes of trading, about 61,000 call options
changed hands in Fannie -- more than three times its average
daily volume and nearly five times the number of puts,
according to option analytics firm Trade Alert.
 Heavy call demand shows that investors expect Fannie and
Freddie stock to rise.
  (Reporting by Elinor Comlay and Jonathan Spicer; additional
reporting by David Gaffen, Doris Frankel and Joe Giannone;
editing by Ted Kerr, Matthew Lewis and Andre Grenon)


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