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September 1, 2011

August Roller Coaster

Liquidity Holds Amid Market Tumult

By John D'Antona Jr. and James Armstrong

Also in this article

Investors had little trouble finding liquidity as trading exploded at the beginning of August, amid a wave of volatility that hadn't been seen since the financial crisis.

William Quinn, senior equity trader at HighMark Capital Management in San Francisco, said things were orderly despite broad news reports of market tumult.

"We found adequate liquidity in executing orders," Quinn said. "We exercised patience throughout the week and found liquidity to be there when we needed it."

The market's massive price swings began during the first week in August, when the Dow Jones Industrial Average dropped 5.75 percent. It continued the next week, with the Dow plummeting 635 points on Aug. 8, then rebounding 430 points on Aug. 9, falling another 520 points Aug. 10, and recovering 413 points the next day. The Dow ended the week down only 197 points from the previous Friday.

As the roller coaster ride began, many believed the catalyst for a doubling in trading volume was S&P's downgrading the U.S. government's credit rating. However, the activity had its roots in a confluence of circumstances.

Traders had to contend with trouble in Europe's banking system and concerns over the finances of several countries. In fact, during the week leading up to the downgrade, investors pulled out 0.3%-or $18 billion-of the more than $6 trillion in equity funds.

Yet trading continued throughout the turmoil, as portfolio managers adjusted their investment strategies.

Vipul Nagrath, Bloomberg

Nearly 18 billion shares changed hands on Aug. 8, according to BATS Trading. That's compared to 8.5 billion shares traded on the first day of that month. Earlier this year, volumes averaged about 7.5 billion shares a day.

Bloomberg reported an unprecedented number of quotes, even on days when volume was off slightly, an indication of unfilled orders and the likely presence of high-frequency traders.

According to Vipul Nagrath, Bloomberg's global head of research and development, the firm had never seen such a high level of quotes in the market. Quote activity, or ticks, went about 35 percent higher than anything seen up to that point-including the "flash crash" of May 6, 2010.

"The tick volume is up dramatically, when the actual volume of shares traded isn't at the highest levels," Nagrath said.

Aug. 10 set an all-time high of 43.7 billion ticks. That was about one and a half times the number of ticks recorded during last year's flash crash.

Nagrath said HFTs were the likely culprit for the increase in ticks. He pointed out that while overall volumes were high on Aug. 10, they were actually down somewhat from the previous day. "I believe that some of it is probably due to HFTs," Nagrath said. "The algorithms are out there, putting these bids and offers out, not getting a fill on the other side, and then canceling it."

No 2008 Redux