Up, down or sideways, shares of Citigroup Inc. (C) are the flavor of the month on Wall Street.

Trading in Citigroup shares has skyrocketed since the beginning of August as market participants look for intraday hedging opportunities among a small group of beaten-down financial services stocks. Volume in its shares has been particularly strong in the past two weeks when Citi has regularly accounted for nearly one-fifth of NYSE Composite volume.

Part of the increased volume has to do with bets that Citigroup can come out of the credit crisis without further damage. A bigger driver, though, is that Citi's recent higher share price - the stock gained 54% in August, and has quadrupled since March - has made it easier to short.

In the wake of a 40% pick-up in U.S. stocks since early March, traders are playing for what they expect is an inevitable pullback, according to the heads of several Wall Street trading desks. In that scenario, especially when buying shares in a shaky financial company, it's important to mitigate risk by finding something else to short.

If, for instance, a trader is going to hold an intraday position in Fannie Mae (FNM) and Freddie Mac (FRE) in a bet they are worth more than current market value, he limits his downside by shorting Citi.

"This is a mechanical trade, not a fundamental one," says Kevin Kruszenski, director of equity trading for KeyBanc Capital Markets.

Hedge funds, some day traders and several other market participants are using this barbell approach to stay neutral on the banking sector with a little bias intraday toward a specific stock.

Bank of America Corp. (BAC) is seeing a similar, albeit much smaller, volume increase. The bank may be easy to short, but since it's at about $16 a share, speculative buyers see more upside with Citi, which is around $4.50.

Other banks, such as JPMorgan Chase & Co. (JPM), just don't work as a hedge, as they won't necessarily trade in tandem with a beaten down bank. Citigroup, on the other hand, has the volume, share price, and weakened stature to be the perfect hedge.

In the past, some traders may have shied away from the highly volatile shares of companies as distressed as Fannie, Freddie and American International Group Inc. (AIG). But by hedging with positions in Citigroup, market participants have leapt into all three as they've been able to mitigate some of the downside risk inherent in the highly speculative companies.

The strategy also works because each of these stocks are so liquid that traders can work under the assumption they won't have to hold any part of the trade overnight, taking a page from the playbook of high frequency funds.

Last year, Citigroup usually accounted for around 3% of NYSE Composite volume. On Monday and Tuesday this week, it accounted for 20%. Short volume, or the number of shares sold short over the course of a day, made up about 50% of overall volume in Citigroup shares Tuesday, compared with less than 35% in early August.

High frequency funds, which often account for more than half of stock market trading, are helping facilitate the new trading strategies, and profiting in the process thanks to rebates.

Rebates involve fees that exchanges pay certain market participants for taking one side of a trade. High frequency funds have grasped onto the rebates system as a certain money maker, sometimes even willing to take a loss on a trade in hopes the rebate will keep them in the green.

-By Geoffrey Rogow; Dow Jones Newswires; 212-416-2179; geoffrey.rogow@dowjones.com