is smiling. Billions and billions of shares have traded on the
Nasdaq Stock Market
in recent sessions; in fact, more than a billion shares were exchanged for 11 consecutive sessions heading into today. Previously, there had never been more than two straight days with a billion-plus shares. Moreover, there were only nine trading days with over a billion shares traded on the Nasdaq in all of 1998, when average daily volume set a record at more than 802 million shares.
Trading volume has also been robust on the
New York Stock Exchange
so far this year, with average daily volume at 857 million vs. 673 million in 1998. But the Big Board has simply not kept pace with the OTC; seven of Nasdaq's 10 biggest-ever volume days have occurred in 1999 vs. none for the NYSE.
Nasdaq-Amex Market Group
spokesman Michael Shokouhi noted Nasdaq volume has increased about 20% annually for the past five years. So "it's not a shock to the system," he said. "Yes, it's a billion shares, but it's been a steady climb."
Still, "trade size has definitely been decreasing," Shokouhi said, evidence of increased activity by retail investors; the average OTC trade was 1,200 shares as of Nov. 31 vs. 1,450 a year prior.
The collision of the bull market and ease of trading via the Internet and other electronic means have clearly exacerbated the volume spike. But neither of those factors is new, and yet billion-share days suddenly are commonplace on the Nasdaq.
'You'll be trading a stock, and then you see the frenzy come in,' said Gruntal's Samuel Ginzburg. 'Whether it's an Internet stock or a bank with earnings, any kind of story, people are just blindly chasing them.'
There appears to be no single reason why what was once extraordinary has become mundane. Investor demand for Internet and other tech stocks, the majority of which trade over-the-counter, is clearly a major influence. The
Nasdaq Composite Index
rose 39.6% in 1998 and was up 6.9% year to date heading into today, leading major proxies for both periods.
The performance has become a self-fulfilling prophecy of sorts. William Keuffel, market strategist at
Optima Investment Research
in Chicago, notes with the very strong market and the tremendous gains in the Internet stocks, it's been more likely for investors to earn short-term profits, which has probably increased activity. However, as those prices correct, perhaps the Nasdaq volume will decrease, he added.
Still, more than a billion shares traded
yesterday, when the Nasdaq Comp fell nearly 3%. Today, volume stood at 800 million shares shortly before 3 p.m.
Day Traders Play a Big Part
Day traders, especially, are a major factor in the spike in both volume and volatility, traders said. For example, when
went public Jan. 15, more than 9.8 million shares traded, meaning each of the 2.75 million shares included in the IPO traded more than three times.
Moreover, that kind of action isn't limited to hot IPOs.
"You'll be trading a stock, and then you see the frenzy come in," said Samuel Ginzburg, managing director of equity trading at
. "Whether it's an Internet stock or a bank with earnings, any kind of story, people are just blindly chasing them. When you see a big bid show up, everybody is jumping ahead, and on the offer side, everyone is jumping ahead trying to sell before anyone else. That's adding to the frenzy and making the volume go to levels that are surprising."
Ginzburg said some institutional investors are "having to get more aggressive and think quicker than in the past," because they know retail investors will clamor into a stock that appears to have momentum.
Double-counting is another factor in the volume explosion, according to Scott Curtis, senior equity trader at
Brown Brothers Harriman
, referring to current rules that stipulate market-makers count so-called riskless principal transactions twice. A riskless trade occurs when a buyer is already lined up for a security being bought by a market-maker. A proposal to eliminate the practice has been submitted to the
Securities and Exchange Commission
, which declined to comment.
One study predicted a change in the double-counting regulation would eliminate "anywhere from 4% to 7%" of Nasdaq volume, Nasdaq's Shokouhi said.
But Jay Suskind, head of institutional equity trading at
, downplayed the impact of double-counting. If over-the-counter volume on a given day is 1 billion shares, he estimated it would still be about 800 million sans double-counting. "It's still a tremendous amount of volume," Beck said.
Make Me a Market as Fast as You Can
A side effect of the rising volume and volatility is speculation that many market-makers are now cowed against taking positions, especially in some of the most volatile Internet stocks. (
first reported on this trend
Dec. 9. This week,
The Wall Street Journal
Bernard Madoff Investment Securities
will no longer make markets in
Market-makers maintain orderly markets in given securities by standing ready to buy or sell at publicly quoted prices. They may also buy securities from issuers for resale to customers or other broker/dealers. When market-makers buy securities for later resale, they generally take short positions as a hedge, "a recipe for disaster" in highflying stocks such as Yahoo!, observed one New York-based trader.
Kenneth Pasternak, president and CEO of
, the parent of market-maker
agreed. "I think most market-makers are less inclined to commit capital," he said. "I think the risk/reward model has changed. Look at
after opening down 16 at 166, it has rebounded to 214. Internet stocks have changed the economics of committing capital -- you can't commit with the same rules or frankly you'll lose money. But let's be honest, there are two worlds -- Internet stocks and regular stocks."
Pasternak noted Knight/Trimark raised its overnight capital commitment to over $200 million in the fourth quarter of 1998, double its pre-IPO level. Furthermore, Nasdaq's Shokouhi said Internet stocks are not abhorrent to all market-makers.
"Market-makers don't like volatility, but they like volume because that's an opportunity to make money," he said. "These guys are pros, they know the risks. If there's a vacuum, it will be filled if there's a chance to make money."
A recent study supports that contention. For example, an average of 35.91 firms per day made markets in Amazon.com in July, Shokouhi said. In the months of October, November and December, the average was more than 39 per day and totaled 40 in a one-day "snapshot" taken Jan. 13. Similar trends were evident for other Net names:
went from an average of 28.1 market-makers in July to 46 in December;
market-makers rose from an average of 27.68 in July to 46.95 in December; and Infoseek rose from 37.27 in July to 42.95 in December.
Despite the risks, it seems some market-makers can't stay away from the potential rewards in Internet names -- just like retail investors. As long as those trends remain in synch, the billions (of shares, at least) will continue to pile up.