On a day that saw more share volume than any other in the history of Wall Street, traders yesterday showed a cool hand while working in incredibly volatile markets. Unprecedented news about Lehman Brothers, Merrill Lynch and AIG, followed by uncertainty over the fate of Morgan Stanley, has led to exploding volumes and wild price swings all week.
And though volumes have been rising–13.6 billion shares traded on Monday, 15.8 billion on Tuesday and 16 billion on Wednesday–on Thursday more than 18.6 billion shares changed hands, according to the latest BATS Trading market volume summary. As of 11:30 today, about 6.7 billion shares have changed hands.
On Wednesday, the Chicago Board Options Exchange’s volatility index–or VIX–measured 36.22. This is the highest it has measured using the CBOE’s new methodology, and the highest overall since October 2002.
Throughout Thursday the Dow Jones Industrial Average seesawed 617 points. For its part, the VIX reached an intraday high of 42.16, but closed at a still-rocky 33.1. Generally, the markets are considered volatile when the VIX reaches 25.
Through it all, traders say they’ve been busier than usual but have neither panicked, nor struggled mightily to find liquidity and execute their orders. “It’s been easier to buy, no question about that,” says Kurt Kujawa, head trader at Cortina Asset Management, in Milwaukee, Wis. “But we’ve been able to make some decent sells, as well.”
Asset managers at Cortina have been using the market swings as an opportunity to re-assess their positions. They’ve been able to smooth out their portfolios by buying some stocks that have gotten cheaper and selling others, Kujawa says.
“Everything’s down,” Kujawa said Thursday, during a low point in the market. “We’ll use this to clean out some of the holdings we don’t want anymore.”
For John Despotopulos, head trader at Lee Munder Capital Group, the volatility has been a time to make sure the lines of communication are open between portfolio managers and traders. He adds that Lee Munder has been using more direct market access to control its orders more.
“One of the important things to remember during times like this is making sure that we’re all on the same page, and knowing exactly what we’re trying to do,” Despotopulos says. “We’ve had that in place and it’s very helpful in times like this.”
At Thomas Weisel Partners, electronic trading head Stephen Blatney says his desk has seen a substantial increase in flow over the last week or so. He’s also seen more activity in both portfolios and its algo business.
Blatney has been advising his clients on strategies. These include using strict limits on the names they’re trading, trying to minimize downside risk, as well as being vigilant and diligent, and reaching out to clients when something looks a little skewed.
“It’s better to do more of an in-line buy-in participation-type event,” he says. “Maybe we’ll try to be a little more aggressive and pick shorter time horizons.”
John Moore, head of institutional sales and trading at William Blair & Company, has noticed differences from the 14-month market drama with other downturns, such as in 1987. Then, there was a lot of anxiety, emotion and panic when market infrastructure broke down and people weren’t able to price securities, he says.
What’s different this time, Moore adds, is that market structure improvements and technology upgrades over the last 20 years have provided the backbone to support the type of dramatic increase in volume and volatility today.
So the markets are functioning, he adds, and liquidity is available in one form or another. Like many, though, Moore has his worries.
“We certainly have achieved quite a bit and made a tremendous amount of progress,” he says. “Yet with the tremendous fundamental dislocation that we’re experiencing in the financial sector–as people address balance sheet issues and investors question business models–it’s a tumultuous experience.”
