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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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March 1, 2003

Banking On The Financial Sector: Not all Nasdaq stocks have tanked. In fact, one group of stocks ha

By Peter Chapman

Also in this article

  • Banking On The Financial Sector: Not all Nasdaq stocks have tanked. In fact, one group of stocks ha

The past three years have been a disaster for Nasdaq. Prices have plunged. Trading volume is off. From a record high of 5,048 on March 10, 2000, the Nasdaq composite has dropped to around 1,300.

One sector, however, has bucked the trend: Financial stocks. As a group, financial stocks have shot straight up, going in the opposite direction of the broader market.

Nasdaq's bank and insurance stocks have been on the rise since March 2000, the same month the broader market began its steep descent. In the past three years, the Nasdaq Bank Index has risen 57 percent. The Nasdaq Insurance Index, meanwhile, has gone up 37 percent.

On the flip side, during the same period, the Nasdaq Composite Index has lost three-quarters, or $4.75 trillion, of its value.

Nasdaq desks that specialize in financial stocks are obviously pleased. "The sector is strong and relatively healthy," said Jay Suskind, head trader at Ryan, Beck, one of the larger brokerages to trade financials. "The small and mid-cap names have done very well for the past two to three years."

In the aggregate, desks are doing better with these names than the broad market. Trading volume in the ten biggest financial names rose 30.6 percent in 2001, and 11.8 percent in 2002. Overall, Nasdaq share volume grew only 6.4 percent in 2001 and declined 7.9 percent in 2002.

Special Focus

Ryan, Beck is one of about a dozen specialist and regional market makers that focus on financial stocks. Others are Keefe, Bruyette & Woods; Sandler O'Neill & Partners; Stifel, Nicolaus; Hoefer & Arnett; McConnell, Budd & Romano; Sterne Agee & Leach; Howe Barnes Investments and Fox-Pitt, Kelton.

All of these are small or mid-sized houses. All are likely to stay that way. Despite the large number of financial stocks, the sector is still a niche by most measures. About 750 of Nasdaq's 3,600 common stocks are regional banks, thrifts, insurance companies and specialty shops.

By dollar volume, financial stocks comprise only a small percentage of all trading. That wasn't true in the early days of Nasdaq. In the 1970s and 1980s, such financials as AIG, GEICO and California Federal appeared regularly on the most active lists.

At its inception in 1985, the Nasdaq Financial Index, which consists of the 100 largest financial stocks, made up 13 percent of all dollar volume.

The group's comeback reflects, of course, the deflation of Nasdaq trading volumes. In 2000, Nasdaq dollar volume hit $20 trillion. So far this year, it is running at a $6 trillion rate. That takes the market back to where it was in 1998.

Leading the regional banking sector upwards is a combination of events, according to traders and analysts. These include low interest rates, a strong housing market, stock buyback programs and the flight from Enron-type problems at money center banks. Another factor, of course, is the flight from technology.

One analyst boils it down to earnings. "The industry has been producing double digit earnings-per-share gains in each of the past 14 years except one," said Robert Albertson, chief strategist at Sandler O'Neill. "Investors paid extraordinary prices for technology stocks on the theory of growth - growth that wasn't there. So now they're backing away from that false assumption. It is very natural you would see this sector outperform."