Article on trading increase by small investors and it's effects - CPQ/Dell are mentioned...
John
November 16, 1998
Individual Investors Show
Greater Market Presence
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
The little guy isn't so little any more.
After years of increasing dominance by big institutional money managers,
U.S. individual investors are showing a greater presence in daily
stock-market activity, and indeed the dominant presence in many hot
technology stocks.
As Americans overall have increased their holdings of stock, some have
done so by buying individual stocks rather than mutual funds. But many
institutional investors believe the bulk of "retail" trading is by "day traders"
using new, low-cost tools such as online brokerage accounts to move
rapidly in and out of stocks. Institutions say they create volatility and make
it harder for them to trade efficiently.
While stock-trading volume has soared to one record after another this
year, a growing portion of it is taking place in small trades, and a shrinking
portion in large "block" trades of 10,000 shares or more. Indeed, in some
hot Internet stocks, there are almost no block trades, suggesting these
stocks dance pretty much to the tune of individual investors.
Internet Fever
This may help explain how stock prices have recovered from so many
setbacks that have unsettled Wall Street professionals. On Friday, the
Dow Jones Industrial Average rose 89.85 points, or 1.02%, to 8919.59,
back to within 100 points of 9000. But blue chips were a sideshow to
Internet fever. On its first day of trading, theglobe.com opened at 87, up
almost tenfold from its offering price of 9. It ended the day at 63 1/2, with
a market capitalization of $622 million, though it expects to lose money for
the foreseeable future.
But institutions didn't appear to play a big part in the stock's frenzied
activity. Although 15.7 million shares of theglobe.com traded, five times
the 3.1 million shares sold in the IPO, the largest single trade was 115,000
shares, according to data vendor ADP Inc., and only seven trades topped
50,000 shares.
Institutions had even less of a presence in the trading of EarthWeb, which
more than tripled Wednesday, its first day of trading, to 48 11/16 from its
offering price of 14. In its first three days of trading, a staggering 31 million
shares changed hands, 15 times the 2.1 million shares sold in EarthWeb's
IPO, yet the largest single trade was 60,000. Friday, volume reached 7.1
million, but only three trades topped 10,000 shares, according to ADP.
"You're basically seeing a tremendous amount of activity coming in from
short-term trading types, day traders, who are operating over the
Internet," says William Kissell, head trader at institutional money manager
Lynch & Mayer. "Their average size is roughly 700 shares or so. That's
why you've seen Internet hot stocks trading like wild: Small investors are
buying these things to abandon, basically because they have a 'dot-com'
on them. For the majority of these stocks, with the exception of the
America Onlines and Yahoos of the world, you can't build a case
fundamentally why you'd own them."
'Day Trader' Activity
Even some larger stocks like Lucent Technologies are seeing high levels of
"day trader" activity, Mr. Kissell says. "This type of player is creating a lot
of volatility which is not necessarily good for people running pension
money because it makes it increasingly difficult to build positions at
attractive prices." A fund manager could see a lot of his returns eaten up
by trading in such volatile conditions, forcing him to be far more patient, he
says.
David Cushing, director of research at ITG Inc., a broker that trades
stock through electronic networks for institutional investors, found
individuals' activity appears to have grown sharply in some of the largest
technology stocks. Between August 1994 and August 1998, the share of
dollar volume that occurred in trades of 1,000 shares or less rose from
31% to 67% for Dell Computer, from 22% to 44% for Microsoft, from
11% to 18% in Compaq Computer and from 13% to 20% in Silicon
Graphics.
The trend is more subdued for traditional blue-chip stocks. The
small-trade share of volume rose from 15% to 25% for General Electric,
but was unchanged at 21% for Merck and 15% for Exxon, while it
dropped from 14% to 11% for AT&T.
Nonetheless, overall the share of New York Stock Exchange volume
accounted for by block trades of 10,000 or more shares has slipped to
under 49% this year, from 57% in 1995.
Mr. Cushing attributes these trends to increased day-trading by
individuals, and institutions chopping big trades up into smaller pieces
because it is so difficult to find an offsetting trade of sufficient size.
"For a long time, retail investors were disadvantaged, but I'd go as far as
to say they're enjoying too much of an advantage now," said Mr. Cushing.
New rules that improve dealers' handling of investors' orders, the
reduction in minimum bid-ask spreads from 12.5 cents to 6.25 cents, and
"the explosion of technology-based access to markets" have given
individual day traders, not just ordinary retail investors, many of the
advantages of professional stock dealers, without their responsibility of
quoting bids and offers on demand for customers.
Role of Discount Brokers
Individual trading is growing in part thanks to discount brokers like
Charles Schwab Corp. In the third quarter of this year, the firm's
customers racked up an average of 99,600 revenue-generating trades a
day, double the 48,700 of two years earlier, while the average commission
per trade fell to $52.83, down 21% from two years earlier. In the third
quarter, 54% of Schwab customers' trades were done over the Internet.
"The idea that institutions are all buy-and-hold players is sort of a joke,"
says Glen Mathison, spokesman for Schwab. "Blaming market volatility on
retail investors is like throwing a party and getting mad when guests
actually show up. The individual investors have been praised by some of
these same people for keeping the market going, and then when some of
them exercise their judgment on particular investments, they're criticized."
Mr. Mathison adds that while the gap is closing, institutions still hold a lot
of advantages over individuals. For example, although individuals are
slowly getting more access to IPOs, many brokerage firms impose
limitations on how soon after receiving shares of an IPO an individual can
sell them.
Richard Wines, senior managing director at Thomson Investor Relations,
which analyzes shareholder activity, says customers of electronic brokers
turn their holdings over about five times as often as customers of traditional
retail brokerage firms such as PaineWebber.
But while individuals are more active, Mr. Wines doesn't believe they are
more influential in determining where stock prices end up. "They're doing
more day-to-day trading but only the professionals do the in-depth
research that will determine ... the true value of what a company is. It's
almost like suddenly [individuals] have a new toy and I have to think that
short term, the market is really a zero sum game and a lot of them,
especially when they get to their tax returns, are going to realize this is not
a lot of fun."
Mr. Wines's research shows individuals like to buy stocks that fall sharply
in price. "We can still expect when individual companies and to some
degree the market as a whole goes down, individuals are likely to be net
buyers and provide significant support."
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