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Wits beat out speed in S&P's post-taper surge

Sometimes speed alone doesn't cut it.

When the Fed announced Wednesday that it would begin to taper its asset purchases, stocks momentarily fell before surging back, with the S&P finishing up 1.7 percent.

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The initial drop may have made intuitive sense for market watchers, as a tapering announcement was expected to be bad news for the market. But traders say the wrong-footed move was just one more example of speed being an inferior tool to intelligent analysis.

"The $10 billion taper hides the fact that they actually boosted QE," given the Federal Reserve's dovish reassurances about accommodative policy and low rates, said Jeff Kilburg of KKM Financial. "Market were duped initially to think that they were exiting, and acted accordingly."

(Read more: Fed hits a home run! Stocks rally on taper verdict)

Rather than the taper being negative, then, it proved that "we can have our cake and eat it, too," said iiTrader's Rich Ilczysyzn. And as the market responded positively to the dovish and economically bullish comments from Chairman Ben Bernanke, the markets eventually moved much higher.

The volatile action was reminiscent of similarly bipolar trading in gold on Dec. 6, when the precious metal plunged on the employment report release only to rise into the close. In that case, too, traders were trying to make a quick judgment about what the news meant for the future of the Fed's QE program.

(Read more: Here's what was behind gold's wacky jobs reaction)

"The markets often make a move off the initial release of data, and then the non-algos digest the data and very easily move markets the opposite way," said Brian Stutland of the Stutland Volatility Group. "It's the next day when the final move follows through."

For Manoj Narang, CEO of high-frequency trading firm Tradeworx, speed trading on a Fed headline is a fool's errand.

"We're not trying to guess the direction of the market on Fed moves, because it's borderline impossible to do," Narang told CNBC.com. "I don't think it's possible to form an opinion on which way the market's going after the Fed announcement. It takes some time to parse the words, and it takes better-than-machine intelligence to parse the words."

For Narang, forming an opinion not only involves figuring out exactly what the Federal Reserve is really saying, but also comparing that to the market's "always ambiguous" prior expectations of what the Fed would say. That's why Fed news can be so difficult to trade quickly—despite the instinct to do so.

"People want to trade as soon as possible ahead of news. I've been on a lot of trading floors, and what happens is the head of research shouts out what he thinks the info means in terms of a price target on the S&P or bond futures, and people trade on that," he said. "The problem is, the quicker you try to trade, the less refined your analysis is, so there's a risk of being wrong."

That's why Narang doesn't make too much of the initial reaction on Wednesday.

"For us, it was a pretty volatile day, full of sound and fury, signifying nothing," Narang said, paraphrasing Shakespeare. "It's only after people who have capital to commit, commit it, that the fair price will become evident. In the meantime, it's full of fits and turns."

Anthony Grisanti of GRZ Energy is cheering the speedy misinterpretation.

"These [speed trading] programs aren't defined enough or savvy enough to read into what this taper means," Grisanti said of the wonky action. "And that is actually good news for traders like me."


—By CNBC's Alex Rosenberg. Follow him on Twitter @C NBCAlex.

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