Robbing Blue-Collar -- Dendreon (DNDN)
Systemic risk exists when individual action seems reasonable but aggregated individual action is detrimental to the system. Systemic risk is bad, right? Well, not if you know how to play the game.
Today, Dendreon (DNDN) was trading in the $24 range when it dropped to the $7-$8 range before trading was halted at around $11. This happened over a period of two minutes. What happened? Let me give a little bit of background. Today, the company was set to release the data from its stage-3 clinical trial at a conference around 1:30 CDT. Trading was set to halt during that conference as material information is made public. Instead trading was halted around 11:30 CDT because huge (~3million) trades were executed dropping the stock price some 64%. Was bad news about the results leaked in advance? No. The result of the study was promising: The drug extended survival in patients b 4.1 months and showed a 22.5% increase in survival after three years. Was it a rumor of bad results? No, I don't think that was it either.
So what really happened that could push the price down so far so fast?
I don't know, but I have a guess. Because everyone was awaiting news, it was highly likely that investors had placed stop-loss orders with their brokers. Stop-loss orders would have initiated a sell order if the price dropped past a predetermined point. If I were a Robber Baron, out to enrich myself and using my wealth as leverage, I would have put in a huge market order to sell in order to drop the price a few dollars. This would have triggered those stop-loss orders and so the sell pressure would have snowballed, cascaded. As the snow ball gains momentum, the Robber-Baron would purchase the shares as the stock price plummets. Having a lot of uncertainty in the market for DNDN today was an additional factor that made this strategy effective. A large sell order might convince other participants that the large and dramatic sell order was caused by leaked information coming from the scheduled conference.
So a stop-loss is a good private mechanism for reducing losses, but if lots of people have stop-loss orders it could make the situation worse for everyone. Someone took advantage of the built up systemic risk in the stock and came away very, very rich.
I believe that's what happened today and the most victimized are the ones with stop-loss orders (the ones who thought they were insuring themselves against large losses), because they are the ones who sold to the Robber-Baron for cents on the dollar. I fully expect Dendreon to re-open much much higher tomorrow, around $25 or more.
Disclosure: I own DNDN stock but didn't participate in today's drama.