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The Liquidity Problem

Maudlin Economics Jared Dillian examines stock market liquidity.

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September 30, 2001

Dealers Committed Bundles of Capital

By Sanford Wexler

When the listed and Nasdaq stock markets reopened after the terrorist attack on the World Trade Center towers, major dealers stepped up to the plate - with huge piles of cash. Their pledge to buy large blocks of stock was backed up by the Federal Reserves huge credit lines.

The NYSE experienced record volume when trading resumed on Sept. 17 - 2.3 billion shares were traded. Nasdaq handled some 2.18 billion shares.

Credit Suisse First Boston in New York, handled some 283 million listed shares on Sept. 17, according to Michael Clark, head of global equity trading at the firm. This was about 11 percent of the volume traded on the NYSE.

"We did about four times the amount of business we normally do," Clark said. "There was about four times the amount of capital committed than was [usually] required." And the dealer handled about double the amount of business it ordinarily conducts on Nasdaq.

However, on the buyside, not all trading desks were looking for more liquidity. Tim Mahoney, director of trading at Merrill Lynch Asset Management in Princeton, N.J., said there were a number of firms willing to commit more capital, although his firm did not tap this extra supply.

"We weren't big users of capital," he said. "It was a very orderly market on Monday [Sept. 17]. I knew there would be some [premium involved] if we did need more capital."