Anatomy of a Mark-Up: How Big Traders Toyed With Techs as July Ended

Mutual-fund machinations have long made the last day of a quarter a volatile time in the stock market. In a practice known as "window dressing" -- which no fund manager will admit to -- the losers in a portfolio are sold off, while the stocks that have performed well over the past three months get loaded up on. This makes a fund's end-of-quarter statement more pleasing to the eye.

Even more unscrupulously, some mutual-fund managers "mark up" stocks at the end of the quarter, driving selected issues higher with a flurry of buying in the closing minutes of trade to improve their quarterly statements. It's a ridiculous sort of game, because the price moves up are completely artificial -- most of the time, the stocks will come back down the next day. But ridiculous though the game may be, it looks like hedge funds have started playing.

Such funds, private investment vehicles that cater to high-net-worth individuals, post their returns on a monthly basis. And that seems to be a clue to the moves in some big tech stocks in the final minutes of trading Monday, July 31.

A number of stocks, including more than half of the 24 components in TheStreet.com Internet Sector index, or the DOT, spiked higher just ahead of the closing bell. Among them, Lycos (LCOS Quote) added 2.3% in the last half-hour of trading, Ariba (ARBA Quote) tacked on 1.5%, and BroadVision (BVSN Quote) skipped up 3.4%. The DOT itself rose 1.3% in those last 30 minutes.

Traders were surprised to see what they've come to think of as a quarterly phenomenon turn into a month-end one. "You don't usually see that intraquarter," remarks Tony Cecin, manager of Nasdaq trading at U.S. Bancorp Piper Jaffray. "It's usually an end-of-quarter phenomenon."

On Yer Mark! BroadVision, Ariba and Lycos, Monday and Tuesday, five-minute increments

Monthly results generally don't matter that much for mutual funds, where most investors watch only quarterly returns (and more activist investors can check the daily returns). "But hedge funds do report month results," points out Todd Clark, who is the head of listed trading at WR Hambrecht and worked, in a past life, as a hedge-fund manager.

"There's a lot of money out there and there's a lot of money that is interested in monthly returns," confirms Seth Tobias, manager at the New York-based hedge fund Circle T Partners. "Everybody seemed to want to take stocks up." (Tobias says that he wasn't doing the buying, instead engaging in the cathartic experience of making a couple of positions on which he'd lost money go away.)

Yet there has been a lot of money interested in monthly returns for some time -- why the sudden pronounced effect for the end of July? One could obviously spin some interesting theories about how the kids running hedge funds today don't have the strong ethical sense money managers used to have, and so on. But the mark-ups probably have as much to do with stocks' action in July as anything else.

Stocks were on a real nice run until midmonth, and even though they'd come down by the beginning of last week, the major indices were, at worst, flat. But things went south from there, and Friday, when the Nasdaq Composite Index dropped 4.7%, a lot of tech-heavy hedge funds saw their profit-and-loss statements, or P&Ls, suddenly turn sour.

"There were situations where stocks went from 100 to 150 to 100 in the timeframe of 30 days," says Tobias. "I think there was a lot of end-of-the-month gasping for air -- 'Let's get up our P&Ls.' "

How much is a lot? No way to tell. But Clark points out, "That they were able to move things while volume wasn't bad, per se -- it was pretty good for a summer Monday -- does suggest it was pretty widespread."

All those people who marked up stocks Monday ran into a bit of a hangover Tuesday, though. Ariba, Lycos, BroadVision -- all of them dropped, along with the DOT and the broader Nasdaq. August has only just started, and it's already a tough month.