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August 1, 2011

Traders Work Throughout Day

By James Armstrong

This year's reconstitution of the Russell indexes saw trading volumes for affected stocks nearly double, but the day was calm overall, with the majority of the action coming just at the close.

The spike in trading came at the end of Russell Recon Day, with active traders not changing their behavior in anticipation, according to a new report by Credit Suisse.

The Russell indexes were updated on June 24, but volumes throughout that day remained very close to any other day until around 3:30 p.m., shortly before the market's close. The surge of volume at the end of the day did not seem to impact trading earlier, the report found.

Ana Avramovic

According to Credit Suisse, active traders do not appear to hold back orders in anticipation of the excess liquidity provided by the Russell rebalancing.

"You might think if you're an active guy and you need a lot of liquidity, that you should wait till the index volumes come at the end of the day," said Ana Avramovic, an analyst with Credit Suisse. "But you have to remember, offsetting that is that there's also more volatility at the end of the day." For active traders, the one-time event of the Russell rebalancing might not be as great an opportunity as some might think.

"They're realizing that it's not a free lunch," Avramovic said.

Charlie Behette, director of portfolio trading at ITG, said he was surprised by the study's results.

"I would expect to see volumes elevated across all stocks as well as across stocks that normally don't trade," Behette said.

Behette looked at a number of stocks that he expected to have elevated volume throughout the day, and he found that a few of them had volume sporadically, but not the overall volume levels he was expecting.

All in all, this year's rebalance was fairly typical, according to Behette. He noted that last year the rebalance accompanied a major rule change, and the previous year it happened in the midst of major market turmoil.

"This year was a much more normal rebalance than we've had for the last couple of years, and much more typical of the kinds of things that do happen over time," Behette said.

Credit Suisse estimates that the gross trade in stocks being rebalanced totaled around $71 billion on Russell Recon Day.

A one-day surge in volume was not enough to burnish overall trading volumes for the first half of 2011. Average daily volumes are down 21 percent compared with the first half of last year, according to Credit Suisse.


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