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June 30, 2001

The Negative Side Of Rising Volume

By Peter Chapman

Volume is rising, but it's not lifting all boats. Traders handling institutional orders are prospering while desks processing retail flow are not.

Nasdaq volume reached 130 billion shares in the first quarter, according to data compiled by J.P. Morgan H&Q.

That was up three percent from the previous quarter and 16 percent from last year's first quarter. Shares traded on the seven exchanges and in the third market hit 99 billion in the same period, up seven percent and 12 percent, respectively.

Most of that gain is accruing to the block traders, J.P. Morgan added. Salomon Smith Barney, Morgan Stanley, Merrill Lynch and Credit Suisse First Boston each doubled-or even tripled-both their listed and Nasdaq volume year-over-year in the first quarter. "Institutions will always dominate the market," said Tony Cecin, head trader at U.S. Bancorp Piper Jaffray. "That's the reality."

On the other hand, wholesalers reliant on retail order flow experienced year-over-year volume declines as individual investor activity fell off sharply, according to the survey. And the bloodletting is increasing.

Knight Trading Group is still the top Nasdaq market maker, but its share of Nasdaq volume slipped to 8.6 percent in the first quarter from 9.6 percent in the fourth quarter. Nasdaq heavyweights Schwab Capital Markets and Herzog, Heine Geduld are also taking blows. Schwab dropped from the No. 2 market maker spot to No. 3. Herzog, a unit of Merrill Lynch, dropped from No. 5 to No. 7.

"When the market loses $3 trillion in market cap you have to believe that a fair amount of that volume was attributable to speculators and to daytraders," said Matt Johnson, head trader at Lehman Brothers. "But with institutional investors, something is constantly feeding the machine; 401(k) money, for example. It's not something that just disappears."