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September 1, 2011

August Roller Coaster

By John D'Antona Jr. and James Armstrong

Also in this article

Throughout all the drama at the beginning of August, equity market liquidity remained excellent from a buysider's perspective. So much so, that pros reported multiple million-share prints during the peak trading days in August.

Though the market had some steep drops, the situation differed dramatically from last year's flash crash, when a flood of sells and a near absence of buys forced the market downward.

Dennis Fox, head trader at Munder Capital Management, said it was business as usual at his firm. But portfolio managers eyed opportunities amid beaten down stocks. "We've been feeding out some sell orders into the strength and getting taken," he said.

Despite selling pressures, Armstrong Shaw Associates added to holdings and didn't buy into the media hype, said Craig Jensen, principal and head of trading at the New Canaan, Conn. firm.

"We were not participants in the selling," Jensen said. "When things are as irrational as they were, we tend to take a step back. With that said, we are long-term investors, so while we will not be the first ones in the market to buy, we look for opportunities to add to positions as things continue to move down."

As rough a ride as it was, Jensen said things never got as bad as they did in 2008 during the financial crisis. The situation this time around, while nerve-racking, was much more quantifiable and offered tangible limits.

"While it can be nauseating, volatility creates opportunity and helps to form bottoms," Jensen said.

Alfred Eskandar, Liquidnet

Blocks Trade

The increased trading and liquidity has also given rise to more block and program trading. Dan Royal, co-head of global trading at Denver-based Janus Capital Group, told Traders Magazine that program trading continued unabated with little change in conviction on the part of portfolio managers.

Alfred Eskandar, head of U.S. equities at block trading venue Liquidnet, said the crossing network shared in the activity. Its volume at the beginning of August was the highest it had been since November 2008.

Liquidnet's block trade size was also up, rising to 50,000 shares in August. "Certainly the appetite for quantity discovery has not dissipated," Eskandar said.

He noted institutions picked up their trading levels before the rest of the market and "well ahead" of the volume uptick following the U.S. credit downgrade. Eskandar interpreted this to mean it was more than just the downgrade that triggered activity.

"The European debt crisis has been in the news for quite some time," Eskandar said. Worries in Europe were a more likely culprit for heightened market activity than anything else, he added.

High-frequency traders remained active throughout the up-and-down days of August. Manoj Narang, founder and chief executive officer of Tradeworx, a Red Bank, N.J. HFT, said his firm profited from the uptick in market activity.