Nothing to do with our situation, but I found this article from the UK interesting. (Safe: Please delete if you find it a waste of time.)

Why is it that the prices of some UK shares move 10pc or more on days on which no company specific news is released? If, like me, you've been watching the stock market recently, this question has probably crossed your mind more than once.

Our collective understanding of how shares should get priced in a "perfect" world struggles to explain such moves.

Fortunately, help is at hand. In recent years, stock market researchers have identified a series of activities that can move share prices temporarily and dramatically away from fair value, possibly explaining some of the violent moves we have seen recently. Two of the more interesting phenomena are known as "predatory trading" and "crowded exits".

If the predator is strong enough, he can move the market price of the stock away from fair value. This imposes losses on the other party, and as the losses build, the victim struggles to hold on to his stock position. Eventually, the victim capitulates and closes out his position at a loss, and at around the same time, the predator closes out his own position at a profit. The share price eventually recovers to its fair value.

Who might fall victim to predatory trading? Victims could include anyone with a position that they might be unable to maintain as losses mount. This could include an investor in financial distress, a hedge fund unable to meet a margin call, or an open-ended fund having to sell shares to meet client redemptions. A more topical example is an underwriter left with an unhedged stock position after a rights issue. Other traders would quickly surmise that the underwriter held unwanted stock.

If the share price were driven lower, the underwriter's losses would mount. For risk control reasons, the underwriter might be unable to hold on to the losing position and might sell low. Predators would cover their own positions by buying cheap stock from the distressed seller.

Now, I do not know for sure that predatory trading was taking place in some UK bank shares recently, but the pattern of share prices and trading volumes that we saw in HBOS shares last week certainly matches the theoretical model.

Another phenomenon that could explain some of the recent, violent share price moves is the concept of "crowded exits". We know that the hedge fund industry has grown rapidly in recent years, and that there has been a noticeable increase in short-selling, the practice that involves selling shares that are not owned and buying them back at some later date, hopefully at an advantageous price.

Now, there is plenty of evidence that heavily shorted stocks perform, on average, badly and this suggests a simple trading strategy for short-sellers: namely, to identify heavily shorted stocks and build further short positions in those stocks. However, such acts of "imitation" change the market dynamics and can lead to unexpected consequences.

In this case, imitation can lead short positions to become large relative to the number of shares that are normally traded each day in stock…the short position is then said to become "crowded".

If a catalyst of some sort were to prompt short-sellers to change their minds rapidly and simultaneously, we would have short-sellers rushing to buy, but no new rush of people seeking to sell. This is known as a crowded exit.

The idea is akin to the audience in a crowded theatre rushing to a narrow exit door once the fire alarm sounds?…?only so many can leave the building in any given interval of time. The effect would be temporary upward pressure on the share price.

A variety of catalysts for a crowded exit are possible: a broker could change a recommendation on a stock, an investor could place a large buy order, or a rumour could cause a rapid change in sentiment.

Recent patterns of share price moves and short-seller activity in companies as diverse as Punch Taverns, Bellway and Trinity Mirror have been consistent with the notion of a crowded exit. In fact, the shares of these three companies rose by an average of 43pc in just four days last week.

A study into crowded exits* using UK stock lending data from Index Explorers shows that crowded exits are associated with significant losses for short-sellers who are unable to cover their positions rapidly. Traditional, long-only investors would generally be unable to exploit this finding by buying into crowded exits, as by definition these are illiquid positions.

If short-sellers continue to grow in importance on the London Stock Exchange, it is likely that we will experience many more crowded exits.

For an active stock market trader, it is vital to be aware of the risk of crowded exits, and to avoid at all costs the risk of becoming a victim of predatory trading. At the same time, astute traders who feel that they understand the reasons for extreme volatility can trade to benefit from temporary mis-pricings.

If they are right and the share prices are eventually restored to fair value, they can earn excess profits. For the rest of us, and in particular for long-term, fundamental investors, the advice is much simpler. Crowded exits and predatory trading are technical events that have nothing to do with the fundamentals of a company.

Fundamental investors should simply ignore the extreme volatility and stick to estimating companies' cash flows.

*Caveat Venditor - Crowded Exits! University of Edinburgh Centre for Financial Markets Research Working Paper. Clunie, Moles and Gao, 2008.

Jeff Randall is away