EXCLUSIVE: THE FUTURE of Deutsche Bank could be decided tomorrow when bosses release its third quarter results, experts warn.
By Siobhan McFadyen
PUBLISHED: 06:48, Wed, Oct 26, 2016 | UPDATED: 10:44, Wed, Oct 26, 2016
Bad news could spark a sell-off contagion that could lead to another global financial meltdown and a bail out by Angela Merkel's government despite her opposition to German state intervention.
Analysts are warning that ultra high frequency trades triggered by machines could lead to a perfect storm and could have serious knock-on effects for other banks exposed to the firm's risky assets book.
Germany's largest lender has been hit by unprecedented sell-offs losing 52 per cent of its value in just a year and is struggling to ward off its crisis.
The bank has announced massive job cuts ahead of a £11.4billion fine from the US Justice Department.
And it has been muted that up to 5,000 jobs could go in America alone.
Now investors, including their biggest stakeholder Qatar, are said to be on edge as they get set to reveal their latest financial data.
Sources say hedge funds are sharpening their claws to make a killing at any cost.
Academic Dean at London Academy of Trading, Paddy Osborn, said: "It's the high tech hedge funds who will do it.
"Those guys are putting in maybe 50,000 orders into the market every second and they get a very low trade to order ratio, maybe only 20 to 30 get executed in a second and then they all get cancelled and then they put another 50,000 in the next second, it's not something a human being could do.
"The orders are triggered by the movement in the price, so a lot of them are speculating in a trend following type strategy, so if the price starts to move in one direction they want to take a position in that direction.
"It's a simple strategy but it's very, very fast, so if you trigger one order that pushes a price a bit low then that could trigger another and another and that's what caused the flash crash in 2010, and I think it probably contributed to the one we saw last year as well after China spluttered a bit.
"In the US only two per cent of institutions who are trading equities use algorithms but nearly three quarters of the volume is innovated by this two per cent of companies in terms of the number of trades.”
Mr Osborn said everyone was looking at Deutsche Bank and “it could go either way” depending on Thursday’s results.
Algorithmic trading is computer generated instructions which are automatically placed in the market.
He added: ”If the results come out and they are not quite as bad then the share price could go up.
"But the big investors already have a good idea of what is going to happen.
"When you get these stressful situations they do add to the volatility and particularly when the market goes down because of psychology and nothing else.
"I think when you get a bad event, algo trading does not help, and it will overshoot downwards and then bounce back up again and settle at the right level in that particular event.
"But that's the point one percent of the time when algo trades do not do service to the market.
"If we didn't have algo trading the market would be illiquid and people would struggle to buy and sell at all, which would increase volatility and spreads.
"If we get dramatically bad news from Deutsche Bank then it could accentuate the move down and it will spike down.
"Share prices move in sectors and if one gets hit, if you imagine they're in a bucket together, if one gets infected then a bit of the infection touches the others, it's psychological, it's a practical thing."
The October 27 crunch date is set to be a nerve wracking time for the bank's Chief Executive John Cryan and Deutsche chairman Paul Achleitner not to mention the company's investors worldwide.
Deutsche Bank executives were dealt a hammer blow last week when it was revealed their biggest investor had concerns about the long term strategy after being stung by major losses.
Insiders said Qatar royal family's ruler Sheik Hamad bin Jassim al-Thani bowed out of future equity deals amid claims the bank was involved in dodgy bond dealings.
The bank has repeatedly stated it does not need to raise fresh capital but has announced it is planning to float its asset management arm amid high profile departures.
Qatar sunk £1.57bn into Deutsche Bank two years ago as part of an €7.2bn (£6.5bn) capital increase, at the time paying €29.20 (£26.36) a share.
Now with the share price having plummeted they are said to have become concerned after losing almost €1bn.
All eyes are on the company as they get set to release their results especially with so many hedge funds preparing to short it.
David Morrison, Senior Market Strategist at Spread Co said: "Some of the worst abuses attributed to HFT/algorithmic trading have either been outlawed or are now more difficult to carry out on the scale they once were.
"However, there are still serious concerns over this type of high-speed, high-volume trading and how it could destabilise the market in an individual stock, an index or currency pair.
"Deutsche Bank has been in trouble for a long time.
"But the US Department of Justice’s proposed $14 billion fine is potentially large enough to bury the German bank once and for all, government bailouts excepted.
"Given this, it’s a grave concern that a month on from being hit with the fine, Deutsche Bank hasn’t managed to reach some form of accommodation with the DOJ.
He said this was unnerving investors, including Qatar.
The expert added: ”Putting these two issues together, particularly ahead of the release of Deutsche’s third quarter earnings, indicates the possibility of a perfect storm brewing.
"But it’s worth remembering that there’s not much that Deutsche Bank itself doesn’t know about equity algo trading.
"Given this one would expect the bank to have built-in immunity to a “flash crash” which occurs when the bids disappear for a stock.
"Of course, it would be highly ironic if it was HFT/algo trading which sent the stock price to fresh record lows – effectively wiping out equity investors – Qatar included".