Trading by Small Investors Hits Unprecedented Levels
The 1990s bull market has long been a story of increasing participation by small investors, but new data suggest trading by individuals now has hit warp speed.
An explosion of relatively small trades, especially in technology stocks, has pushed activity on the Nasdaq Stock Market to heights that have left analysts stunned and the market’s computers straining.
Total share volume in Nasdaq stocks has routinely topped 1.1 billion shares a day in November, but that overall figure tells only part of the story, experts say.
What has taken Wall Street by surprise is the surge in the number of individual trades submitted by investors.
The average number of Nasdaq trades per day has reached 1.7 million in November, up 35% from October, Nasdaq officials say.
A record 2.23 million Nasdaq trades were recorded on Nov. 17, and the 12 biggest trading days in the market’s history have all come this month.
That unprecedented activity is a function of the irresistible attraction of the technology stock sector--which dominates Nasdaq--to small and large investors alike, analysts say.
“It’s caught the imagination of everybody,” said Kenneth D. Pasternak, chief executive of Knight/Trimark Group, the largest dealer in Nasdaq stocks.
But another statistic underlines how smaller investors have become an increasingly important factor in Nasdaq trading: The average number of shares per Nasdaq trade has fallen steadily in recent years, to about 764 shares this month from 1,556 in January 1997.
Institutional investors typically trade in blocks of 5,000 to 10,000 shares or more, so it takes a large number of smaller orders to drag down the average trade size, experts note.
Although Nasdaq-listed tech stocks such as Intel Corp., Sun Microsystems Inc. and Oracle Corp. have led the U.S. bull market for much of the 1990s, demand for many of those stocks has skyrocketed in recent weeks.
That demand, coupled with a resurgence in many relatively new Internet stocks, has pushed the Nasdaq composite stock index to record highs on 16 of the last 20 trading days--including Wednesday, when it leaped 77.63 points, or 2.3%, to 3,420.50.
Every down day this month--all four of them--has been followed the next day by a new record.
The Nasdaq index now is up 56% year to date. By contrast, the blue-chip Dow Jones industrial average is up 20%.
Trading volume on the New York Stock Exchange also has been heavy lately, but Nasdaq volume has stolen the spotlight.
Yet the gravity-defying performance of tech stocks is precisely what makes some analysts warn that the market is riskier than ever. They say the latest burst of trading activity signals a rush of inexperienced investors into the market, a trend that typically precedes a collapse.
The hype surrounding the latest series of Net-related initial public stock offerings--in which investors have doubled or tripled their money in a day--has only fed the frenzy.
Expedia Inc., for example, the online travel service spun off two weeks ago by Microsoft Corp., nearly quadrupled in its first day of trading.
Similarly, CacheFlow Inc., whose products manage the flow of information over the Internet, went public Friday at an initial price of $24 and closed Wednesday at $115.63, for a three-day gain of 380%.
As trading in those and other Nasdaq tech issues soars, online brokerages are luring more investors to the fray with massive advertising campaigns emphasizing how easy it is to join the party now that Wall Street has been brought to the home computer.
That message will only be amplified next Wednesday when giant Merrill Lynch rolls out its Merrill Lynch Direct online-trading account.
Alluding to the rise in technology shares generally, the jackpot IPOs and the surge in online trading, analyst Greg Smith of Hambrecht & Quist said: “When you get those three moons lining up, you get a high level of speculative fever.”
After something of a lull from July through September, when online trading fell 7.5% compared with the previous three months, the trend is back up and approaching record territory of well more than 500,000 Internet trades a day, Smith said.
Although trading activity was easing off, brokerages kept adding new accounts--more than 1 million in the third quarter alone, Smith said. The new customers may well have contributed to the trading binge of the last few weeks.
“It isn’t healthy, and you know it has to end,” Smith said of the surge in technology stocks, “but it hasn’t ended yet, and in the meantime look at the gains you’d be missing.”
The tsunami of trades is putting Nasdaq’s computer systems under enormous stress.
On Nov. 16, Nasdaq’s trade-reporting system crashed for 17 minutes amid huge volume shortly before the close of the market.
Nasdaq blamed a software upgrade that technicians had installed the previous evening, but traders insist that the market’s electronic systems have been slow and balky for weeks as they’ve tried to cope with the heaviest trading in history.
“It’s very difficult to comprehend the magnitude of what we’re seeing,” Patrick Campbell, Nasdaq’s chief operating officer, said Wednesday.
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More Trades, Smaller Trades
The average size of Nasdaq stock trades has tumbleda sign that small investors are fueling this year’s rally, experts say. Average trade size each month (number of shares):
Break in scale
Source: Nasdaq Stock Market
* ECONOMIC SURGE
The gross domestic product rose at a 5.5% rate this summer, exceeding projections. C3
