Individual Investors Cut Back on Stock Trades

Stock trading is at a record high these days, but the small investors who flooded into the market at a furious pace earlier in the year are largely sitting on the sidelines, recent data show.

Stung by nasty losses in their favored technology stocks, individuals have dramatically reduced their stock trading from the frenzied levels reached at the stock-market peak in March.

At some online-brokerage firms, trading activity shriveled by almost 50% from March to August, data show. And though it has perked up modestly in the last two months, trading is still down by more than one-third at some firms.

That stands in stark contrast to the volume surge in the broader market. Last month, for example, trading volume hit a new record as a combined average of about 3.1 billion shares a day changed hands on the New York Stock Exchange and Nasdaq Stock Market.

Analysts predict that individuals will return to trading more aggressively in coming months. But many of them have been burned by the market’s repeated stumbles of the last eight months and are waiting for clear signs of a market recovery before they jump back in, they say.

“People have definitely been hurt. Anywhere they’ve turned, they’ve been slapped in the face,” said Greg Smith, an analyst at Chase H&Q; in San Francisco. “But if the [computer] screen turns green for long enough, people will come back in,” he added.

In some ways, the drop-off in trading says a lot more about the March frenzy than it does about the mood in today’s market.

At Ameritrade Holding, for example, customers made an average of 115,000 trades a day in October. That was down 33.5% from March, but it was still more than double the figure from October 1999.

Analysts and the firms point out that new-account growth has remained solid at most firms throughout the year, indicating that individuals are simply waiting for the market to turn before they dash back into trading.

“The accounts are coming in and the volumes will follow because at some point the market will go up,” said Mike Dunn, a spokesman at Datek Online Holdings.

Analysts say there are several reasons why trading activity by individual investors could pick up later this month and in December.

Though it may not be the case this year if November’s rocky start is any guide, the market is traditionally strong in December. Also, individuals getting year-end bonuses often put the money to work in the market.

Volume may pick up for another reason: expected tax-loss selling that must be done by Dec. 31.

Indeed, the volume surge in the broad market the last two months was due in part to tax-related selling done by mutual funds in advance of the Oct. 31 end of their fiscal year.

However, amid the uncertainty over the presidential election and the stiff drops in tech stocks in the first week and a half of this month, trading among individuals appears to have remained tepid, data show.

At Charles Schwab, the largest online brokerage, trading in the first 10 calendar days of November has shrunk 15% from its October level, according to Putnam Lovell Securities.

That could change in a hurry if stocks turn around and individuals start to worry that they’re missing out on the market’s lows, analysts say.

But it’s unlikely that the frenzied trading of last spring will return any time soon, they say.

“You’re going to see a pickup, but it’s going to take a sustained run of three to four months to get back to those frenetic trading levels of March and April,” said Richard Repetto, Putnam Lovell’s online-brokerage analyst.

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On the Sidelines

Even as institutional investors and day traders have boosted their trading activity, individual investors have sharply curtailed their trading amid this year’s market sell-off.

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Average daily trades March 2000 October 2000 Percent change Charles Schwab 346,900 230,200 -33.6% Ameritrade 173,000 115,000 -33.5 Datek Online 135,699 109,426 -19.4 Nasdaq volume 1.78 billion 1.91 billion +7.3 New York Stock Exchange volume 1.13 billion 1.18 billion +4.4

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Sources: Company data, Bloomberg News