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April 1, 1999

The Perils of Liquidity As Market Assets Grow Balancing a Manager's Price Goals With Ease of Trad

By Michael L. O'Reilly

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  • The Perils of Liquidity As Market Assets Grow Balancing a Manager's Price Goals With Ease of Trad
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Four years ago, a large equity holding at Nicholas Applegate Capital Management was 250,000 shares. In 1995, the San Diego money manager had $13.3 billion in assets under management.

Today, Nicholas Applegate has $32 billion in assets, while large positions, or core equity holdings, easily exceed a million shares.

At institutional giants, like Boston-based Fidelity Investments, core holdings regularly reach 90 million shares in a single stock.

With growing assets, money managers are forced to hold larger positions, and many institutional trading desks are having to abandon their traditional price goals in the struggle to find sufficient liquidity to execute orders.

"Liquidity is the biggest problem in the marketplace," said Jamie Atwell, head of equity trading at Nicholas Applegate. "The size of positions have gotten so large. This hasn't been offset by an increase in outstanding shares. I'm willing to sell up or down a little to get an extra 100,000 shares."

In 1993, 20 percent of quarterly trading volume at large money managers was comprised of trades in excess of 250,000 shares, according to a survey by The Plexus Group, a Los Angeles-based consultant on institutional trading costs.

Today, trades of a quarter-million shares or more comprise some 75 percent of total trading volume for those managers.

Last year there were some 6,000 trades of one-million-share blocks in U.S. listed stocks, according to the AutEx Group, a Boston-based provider of block-trading information.

The growth in positions can be attributed to the boom in institutional assets. In January, the total assets of U.S. mutual funds were $5.72 trillion. Overall, investors pumped $12.96 trillion into U.S. equities by the end of 1997, up from $6.24 trillion at the end of 1994.

Atwell said the enormous size of institutional orders has made it more difficult to get in or out of positions. And with increasing volatility in the U.S. markets, institutional traders try to execute large orders before prices swing out of favor.

"I absolutely have to look for liquidity over price," said Maureen Yeazel, head equity trader at Harbor Capital Management Co. in Boston. "You don't try to save an eighth when the markets are moving quickly. If stocks are going down, you try to save a half or a point. It's silly to work every eighth when the markets are really volatile."

Yeazel, whose firm has more than $6.2 billion in assets under management, said that until recently, she could be more patient handling an order. But, over the last year, volatility has forced her firm to get in and out of positions more quickly.

"You don't know when trends will turn, and the trends turn so quickly. You have to be quick or you can lose a lot," she said.

Looking primarily for liquidity creates greater volatility, Yeazel added, as the markets react to the execution of large orders.

Varying Strategies

Of course not all institutional desks trade the same way. Although still concerned with liquidity, some money managers are unwilling to depart from investment strategies for liquidity.