Amid Market Turmoil, Small Investor Is Steadfast
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By DAVID BARBOZA
EW YORK -- The selling was furious early Tuesday. By 1:30 p.m., the Dow Jones industrial
average was down 257 points. And while stocks recovered late in the day, the session, the
fifth busiest on record, came after a week that had the second- and third-heaviest trading days on
record. This surge in activity raises a question: Who exactly is moving the market this summer?
The answer: institutional investors, the same powerful group that sold aggressively last October,
when the Dow tumbled 554 points, or 7.2 percent, in a single day. And the same big-time players
who have soured repeatedly on the bull market, only to jump back in later, after smaller investors
have quietly affirmed their faith.
"The institutions are busy -- they're real busy, there's no question about it," said Bill Allyn, director of
listed trading at Jefferies & Co. in New York, which handles large institutional trades. "There's a lot
of blood being spilled."
At the same time, small individual investors have continued to open new brokerage accounts and to
buy beaten-down shares, according to executives at mutual-fund companies, discount brokerage
firms and market analysts.
So this summer, when most investors would be expected to be lounging on a beach somewhere,
professional traders and portfolio managers are selling aggressively, presumably on fears about
slowing profit growth at home and economic turmoil in Asia.
They are also shaking up their portfolios, trying to find ways to beat the leading stock indexes, and
engaging in huge program trades, which are growing as a percentage of all trades, according to the
New York Stock Exchange.
In fact, in recent weeks computer-driven program trades have accounted for nearly 18 percent of all
Big Board volume, up from 10.7 percent just eight years ago. (A program trade consists of a trade
of 15 stocks worth at least $1 million).
The statistics may help explain why volume is so heavy this summer, but also why the market may
not tumble in October-like fashion: because a huge majority of smaller investors have apparently not
yet jumped onto the frenzied selling bandwagon by aggressively redeeming shares at mutual funds.
Of course, reliable statistics about trading activity are inexact and difficult to come by because the
identity of most trading is largely secret. But there is a trickle of information that exists about who is
trading, and it suggests that institutions (hedge funds, mutual-fund companies and brokerage houses)
have done the bulk of the selling for the last few weeks, creating a big down-draft in the markets.
Small, individual investors, while also jittery about corporate earnings and the Asian economic crisis,
have been holding steady, just as they did last October.
"The great majority of small investors have done nothing," said Tracey Gordon, a spokeswoman for
Charles Schwab & Co., one of the United States' largest discount brokerage firms. "They stick to
the market like Velcro."
Concern among smaller investors has certainly been heightened this summer because of market
volatility. But brokerage firms say that investors are showing few signs of panic.
"We've seen a lot more rational behavior than we've seen in the past," said Kathy Levinson, chief
operating officer of E-trade, a fast-growing online brokerage firm. "So while the market has been
going down, people have not been panicking."
The idea that institutional investors have been less bullish in these last few weeks is borne out in a
study conducted this week by Birinyi Associates, a market research firm in Greenwich, Conn. In the
period between July 24 and Aug. 11, large institutions have been more aggressive sellers of stocks
than smaller investors, according to a study of stock money flows into the New York Stock
Exchange.
Analysts at Birinyi Associates studied this by tracking large block trades -- those of 10,000 shares
or more -- against smaller trades of fewer than 10,000 shares, which include, for example, an
investor's purchase of 100 shares of IBM. Through Tuesday, the study showed, retail trades created
about $731 million in net buying on the Big Board, while block trades accounted for $3.47 billion in
selling. The bottom line: Institutions sold and smaller investors bought.
"The key to this market is the retail investor," said Jeffrey Rubin, an analyst at Birinyi Associates.
"The retail investors are the ones who have been really correct about this market. And the institutions
haven't been right."
A survey of several brokerage firms this week concluded that smaller investors were nervous after
the Dow tumbled 299 points on Aug. 4 and then fell 257 points in the first hours of Tuesday's
session. But investors did not aggressively trade so much as inquire.
"We've seen an increase in call volume, but most of the calls are more service-related," said Beth
Basilio at Dreyfus Corp., noting that people often inquired about the market's recent performance.
And at a Schwab branch office in Manhattan, the week has been anything but tumultuous. Even
during Tuesday's steep decline, visitors to the office consisted of just a few investors checking quotes
at a computer bank and cheering the market as it reversed course. "It's going up, it's going up," said
one investor, who refused to give his name. "We've gone up 100 points in 10 minutes."
Mo Kraushar, a 42-year-old computer expert, said he wasn't planning on selling stock. "I'm not
moved one way or another," he said tapping away at a computer to check quotes. "I'm a
fundamental kind of guy. I just kind of chuckle at it all. It's like a sporting event."
Another measure of individual investor sentiment lies in the online trading arena, where about 20
percent to 25 percent of all retail trading occurs, according to Bill Burnham, an electronic commerce
analyst with Credit Suisse First Boston.
Online trading has more than doubled in the last year, to about 15 million shares a day, but online
trading executives say that trading activity has not been unusually high this month.
"The online firms are contributing, but their contribution is being overshadowed by the huge volume
coming out of hedge funds and other professional market speculators," Burnham said. "Ultimately,
the retail investor can have an impact on the margins, but at a macro level nothing has the power to
move the market like arbitragers and hedge funds."
Last October's huge selloff was much more serious, many analysts say, and it created much more
activity, even though average trading volume is actually heavier this month -- about 744 million
shares a day, up from about 610 million in October.
Joe Ricketts, chief executive of Ameritrade Holdings, an online brokerage firm based in Omaha,
Neb., said that investors continued to open accounts at a steady pace this summer, and that on the
day after the Aug. 4 selloff, they were eagerly buying shares using Ameritrade's online system.
"We were really busy," Ricketts said. "The individual investors stepped in to buy that day."
If smaller buyers are active in the market, though, much of that activity may be coming from day
traders, individuals who trade professionally and actively each day, and usually close out their
positions at the end of the day.
Like many other professional traders, day traders thrive on market volatility, hoping to make large
profits in price swings. And with market volatility on the rise -- as a result of concerns about the
strength of the bull market -- day traders have been more aggressive than usual, driving up electronic
trading volume by about 30 percent, according to James Lee, president of the Electronic Traders
Association.
"If there's nothing going on, we won't initiate it, but if there's activity, we'll jump in," said Harvey
Houtkin, founder of the All-Tech Investment Group in Montvale, N.J., a professional day-trading
firm. "If it's an active day, we'll make it even more active."
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