NYSE Program Trading Sets Second Straight Weekly Record
06/10/2004
Dow Jones News Services
(Copyright © 2004 Dow Jones & Company, Inc.)
By Jed Horowitz
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Program trading, the simultaneous purchase or sale of stocks in a single transaction, made up 54.9% of average daily shares traded in the first week of June, surpassing a record 54.1% in the previous week.
The numbers are a discouraging sign for market-makers and brokers on the exchange who rely on individual stock trades for higher commissions and volatility that they can exploit. Charges for executing program trades range from 1.3 to 1.5 cents a share compared with 3 to 4 cents for trades of individual stocks, Sanford C. Bernstein analyst Brad Hintz has estimated.
The rise in program trades parallels a decline in overall trading volume on U.S. stock exchanges in recent weeks. That's because firms that use program-trading strategies to mimic the movement of stock indexes remain active, trading-firm officials say. That hurts online brokers such as Ameritrade Holding Corp. (AMTD), which on Wednesday said its average daily trading volume fell 8.3% in April, and market-making firms such as exchange specialists.
"Volumes are lower than where I would like them to be, and as volumes go down program trading rises," Michael LaBranche, chief executive of LaBranche & Co., the largest specialist firm on the NYSE, told investors at a meeting sponsored by Sandler O'Neill & Partners L.P. on Wednesday.
The average daily number of shares traded on the NYSE this year was 1.53 billion shares through the end of May but has dipped to around 1.2 billion in recent sessions.
"I don't know any sell-side desks that are busy right now," LaBranche said, using the terminology for Wall Street firms that buy and sell stocks on behalf of investors, who are known as "the buy side."
Richard Repetto, an analyst at Sandler O'Neill, said last Friday that high program-trading numbers "could dampen results" at market-making firms like LaBranche and its cohorts in Nasdaq Stock Market stocks such as Knight Trading Group Inc. (NITE). Shares of LaBranche fell 20 cents, or 2.3%, to $8.63 in NYSE trading Thursday and Knight fell 27 cents, or 2.3%, to $11.22 on the Nasdaq Stock Market.
Program trading has grown from about 10% of total NYSE volume in 1998 to more than 45% this year through the end of May as more mutual funds and hedge funds adopt the technique.
The NYSE defines the strategy as the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more, under the NYSE's calculations. Last week 677.9 million of the Big Board's average daily volume of 1.2 billion shares were program trades. To derive the percentage, the NYSE takes the sum of all shares bought, sold and sold short in portfolio-trading strategies and divides by total volume.
The percentage would diminish under alternative measurements that count trades rather than share volume or that isolate buy programs as a percentage of total purchases or sell programs as a percentage of total sales, the NYSE said in a news release.
The five most active NYSE member firms in program trading from June 1 through June 4 were UBS AG's (UBS) UBS Securities, Deutsche Bank AG's (DBK) Deutsche Banc Alex Brown, Morgan Stanley (MS), Goldman Sachs Group (GS) and Lehman Brothers (LEH), the NYSE said. UBS was the leader in trading the portfolios as principal for its own accounts and Deutsche Banc as agent on behalf of customers, the NYSE said.
-By Jed Horowitz, Dow Jones Newswires; 201-938-4047; jed.horowitz@dowjones.com
