LG...Who's driving the market...
dailynews.yahoo.com
Saturday January 20 2:45 PM ET
Institutions Behind Big Stock Swings
By Haitham Haddadin
NEW YORK (Reuters) - Tracking the daily action on Wall Street can be a lot like watching a basketball game -- the highlights are the opening tip-off and the frenzied play at the end.
A team of academic finance researchers recently took a fresh look at the so-called ``U-shaped'' pattern of daily stock market trading, the high volume at both ends with a dip in the middle.
Their conclusion: Don't blame share dealers or rapid-fire day traders for increased stock price swings, but the 800-pound gorillas -- institutional investors such as mutual funds, pension funds and banks.
That's a shocker because mutual funds usually underscore their long-term performance and stock-picking skills, rather than talk about turning a fast buck.
The researchers, led by Stanley Block, professor of finance at Texas Christian University in Fort Worth, Texas, based their study on a rare look at the 1988 trading records of NationsBank Dallas, which is now part of Charlotte, N.C.-based Bank of America Corp. (NYSE:BAC - news).
The findings are important for individual investors who compete with professional traders and institutional investment managers, as they must be aware of the influences that others have on stock prices and performance, according to the researchers.
``Our evidence shows that institutional investors provide formidable demand at the end of the day,'' Block said in the study, published in the December issue of The Journal of Business Research. ``While short-term traders may be on the other sides of those transactions, it is clear that the fundamental demand arises from the institutional investors.
``Buy decisions tend to be concentrated during the market's opening and closing hours, and these are the same times when stocks tend to show higher-than-average returns.''
Rare Glimpse At Bank's Trading Records
The research team examined more than 3,500 time-stamped trading records from the trust division of NationsBank for 1988, data which they say is still relevant today.
Block and his colleagues -- Dan French of New Mexico State University and Edwin Maberly of the University of Canterbury in the United Kingdom -- found nearly 48 percent of NationsBank's buy decisions came in the first half hour of trade or in the last hour ahead of the 4 p.m. stock market close.
Even more significant, the early and late deals amounted to about 54 percent of the dollar volume of all equities traded by NationsBank for the day.
For sell decisions, just over 37 percent were made at the start or end of the day, accounting for some 40 percent of the day's dollar volume.
The low point for trade decisions was between 1 and 2 p.m., with just over 7 percent of the bank's buy decisions and 6 percent of sell decisions made during that hour.
Block called the pattern revealed by the data ``very important.''
``It's the first time it's out to the public,'' he told Reuters in a telephone interview. ``That was a very special circumstance. It's almost impossible to get inside a bank or a bank trust department to get the type of data we had.''
Surges in demand for stocks can send equity indices jumping, or ``gapping up,'' at the open from the previous day's close. This was seen as recently as Wednesday, when the Nasdaq Composite index (^IXIC - news), loaded with high-tech companies such as software giant Microsoft Corp. (NasdaqNM:MSFT - news), shot up more than 90 points at the start of the regular trading session.
At other times, the market can turn around dramatically, seemingly out of thin air, either spiking higher at the close from an early slump, or tanking after a strong rally.
``To me, it looks almost like a basketball game where you only have to watch the last five minutes because that's where all the excitement is,'' said Peter Gottlieb, portfolio manager at Chicago-based First Albany Asset Management.
``There's a lot of sophisticated tools and strategies that some institutions use, moving significant money around at the beginning or the very end of the day,'' he said. ``This has a significant impact on the volatility during those times.''
Early, Late Volume Spikes Are Not From The Fast Money
The researchers believe their findings are more than mere coincidence. And the findings run counter to previous studies that attribute the ``U-shaped'' pattern to short-term investors such as market makers, or share dealers, and day traders.
``We came up with evidence that ... (it) is the portfolio managers who really put the pressure on traders and market makers to have that activity,'' Block said.
Block, noting that the day trading phenomenon was less relevant during the period analyzed, says his definition of that group includes professional traders at banks. Day traders -- who typically turn trading positions into cash at the end of the day -- buy and sell stocks several times a day at lightning speed to capitalize on small price moves.
Even some money managers agree with Block's findings.
``It takes a lot of day traders ... to equal even one institution moving a couple of hundred thousand shares at the end of the day,'' said Gottlieb. ``A lot of the day trading money has been washed out in the last market downturn.''
Investors tend to trade more at the open due to the piling up of overnight information and corporate news. Big players usually avoid the after-hours market because there are few buyers and sellers around.
``In the morning, it's a reaction to what happened the night before, like news or morning comments by analysts covering the stocks,'' Gottlieb said. ``At the close, it's more institutional money employing trade strategies like tracking an index ... or part of an arbitrage strategy versus options or an index.''
Others were skeptical of the study's results.
Ned Riley, chief investment strategist at State Street Global Advisors, which manages $740 billion, said the public was contributing just as much, if not more, to volatility.
Fifty percent of U.S. households have either a direct or indirect interest in stocks today, up from 30 percent a decade ago, he said, and the top 15 Nasdaq stocks, including behemoths such as Internet gear maker Cisco Systems Inc. (NasdaqNM:CSCO - news), are dominated by non-institutional money.
``The public is creating a lot more volatility,'' said Riley. ''If a stock like JDS Uniphase (NasdaqNM:JDSU - news) is up 12 percent, and retail volume is three times that in institutional, then I would say the retail guys are creating the volatility,'' he said. |
