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July 31, 2000

The Summertime Trading Blues

By William Hoffman

Summer is rarely kind to the stock mar kets, but some on Wall Street say this season has been particularly hostile to traders and broker dealers.

"I think [a trading slump] was expected, but most people did not expect it to decline this much," said Bernard L. Madoff, chairman of Bernard L. Madoff Investment Securities in New York.

Ace Conway, head of equity trading at Maxum Investment Group in Cleveland, has noticed the slump at his own employer and at other broker dealers. "For me personally, you never know about [your] bonus until the end of the year, though things have definitely slowed down," Conway said.

With the Nasdaq off more than 30 percent from its peak earlier this year, declining volumes on most stock markets and interest rate jitters out of Washington, traders can be forgiven the occasional after-hours sweat.

Yet even among the wary, confidence in the near-term future remains high. "January started like a house on fire," noted Madoff, pointing to record trading volumes set on the Nasdaq in April. "But there's a lot more discipline than in the past."

Firms are using an unprecedented bevy of hedging tools to protect their inventories and profits, Madoff noted. These include futures, options and short positions in liquid holdings to counter balance long positions on relatively illiquid equities, Madoff observed.

"Normally, you can judge the health of every aspect of the [securities] industry by the level of volume," said Robert Fagenson, vice chairman at Van der Mollen Specialists, a New York Stock Exchange specialist firm. But no longer, he cautioned.

Investment bankers have skewed the traditional bellwethers of industry health, he said. The true measure is the share prices of active brokerages. Fortunately, those have remained robust and profitable, Fagenson said.

Harvey I. Houtkin, chief executive of electronic trading firm All-Tech Direct, in Montvale, N.J., disputes the notion of a slump. "That people have gotten used to a euphoric volume does not denote turmoil when it comes down from that," Houtkin said. "Overall, I'd say things are still pretty damn good."

Instead, Houtkin believes its investors' and, to some extent, traders' and broker dealers' expectations that are out of hand.

Analysts tout buying stocks at $250 a share, even though that price exceeds by a multiple the same analysts' earlier predictions for the sell-price of the same stock. "Are these people just doing their jobs, or are they circus shills?" Houtkin said.

Debbie Zoldan, senior trader at Seaport Securities Corp., in New York, said "the summer doldrums this year are probably the same [as the summer of 1999]. It seems worse, but it's probably not worse."

Like other market participants, Zoldan thinks, "we just need something positive to spark the markets."