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April 1, 2001

Burgers and Bubbles

By John A. Byrne ŘEditor

There will be a sigh of relief from traders if a so-called tradable bottom emerges out of the

horrible bloodletting in the U.S. stock markets. The feeble Dow and Nasdaq indexes showed no signs of sustained gains in the quarter ended March 31. With the Nasdaq down more than 60 percent since its record high of 5,048.62 and the Dow off nearly 20 percent since its 11,722.98 peak, more than $4 trillion in legally created wealth has disappeared.

Led by a slowdown in investment spending, there are some remarkable elements in this bear market carnage. One is the absence of serious investor panic. As noted by a veteran in this issue, the meltdown - hopefully, it will soon reverse itself - has been orderly. Some of the reasons are obvious. Investors who prematurely pull money out of their qualified plans are generally penalized for the untaxed gains and may incur a penalty.

The carnage, of course, has eliminated large swaths of hyperactive day traders. At the height of the market boom - some prefer the word bubble - their momentum trading was sometimes laughable. In effect, day traders had collectively become the axe in some technology issues. Several pundits compared day trading to casino style gambling in Atlantic City. What was the redeeming factor as day trading jocks held shares for say, 10 seconds or maybe even 60 minutes, then dumped and reloaded after munching on their greasy burgers? Of course, it could be argued that day traders had become market makers of sorts, adding and subtracting liquidity. But let the academics work that out.

Most of the action now is in the hands of institutional investors who are presumably helping establish more sane stock price valuations. If this continues, the long term viability of the investing style propagated by some ECN outfits may be in question. Meanwhile, share volume on Nasdaq is up 20 percent from last year, a spokesman said. If so, that volume (propelled in part by substantial selloffs in equities), helps cushion Nasdaq's bottom line. Last year, two thirds of its revenue came from trading charges and market data services. But sooner or later, if the market does not rally, that heavy volume is unlikely to remain.

Analysis aside, what is of more immediate interest is the hoped for arrival of the tradable bottom, where the bloodletting has stopped and traders feel the market allows more room for profitable trading. One trader at a substantial sellside firm in New York - a well-respected pundit - expects a market rally to occur shortly. But he frowns upon the technology sector that has delivered such a devastating blow. "Technology?" he howled. "There's too much of it everywhere. We're even overloaded. Flat screens, new platforms, top-notch market data equipment. Give me a break. We're not spending another penny."