Trading Algorithms"WELL Health Technologies shares were down sharply despite reporting better-than-expected earnings in the fourth quarter, but TD Cowen analyst David Kwan says this could be chalked up simply to algorithm trading patterns after the previous day's gains. Shares were down nearly 13% on Thursday to C$3.71 after reporting higher 4Q profit, a revenue beat and upgraded its outlook for the year. On Wednesday, shares rose 8%, and Kwan said Thursday's swing could be trading patterns playing out. "This could be a case of more algo-driven trading patterns," he said."
Based on these comments on WELL from a TD analyst, please expand on how impactful these "algo-driven" trading patterns are on stocks, especially small caps.
It is a difficult question as each brokerage may have their own criteria for algo trading. But generally speaking, price triggers are hit and automated trading begins at certain levels and volume. This can heighten momentum (both ways) of a stock movement, and the movement itself can trigger other algorithms as further price levels are breached. For a small cap stock, with less trading volume, the moves can be dramatic, as market orders hit at further price gaps as liquidity lessens. TD's thesis on WELL makes sense, as trading volume was huge during the last three days of last week, rising to 3.7M, 7.1M and 1.9M shares from an average of about 0.5M shares the prior month. (5iResearch)