End-of-day surge in action boosts costs at other times, increases vulnerability to sharp swings
By DAN STRUMPF Updated May 27, 2015 7:22 p.m. ET
The middle of the day has become awfully quiet on the U.S. stock market, as index funds and computer models push the action toward the end of the trading day.
Across Wall Street, less trading is taking place at 3 p.m. or, in fact, most any time but the opening minutes and the final half hour.
The rising use of index funds, which generally prefer to trade at the close, is contributing to the shift. So are the scores of computer models sniffing out the best times to trade, when they have the greatest chance of matching up without driving the price higher or lower.
The shift also raises the prospect that stocks will be more vulnerable to outsize swings during low-volume trading hours in the middle of the day, an outcome that could expose investors, including retail stock buyers, to losses.
“In the middle of the day…you have such a liquidity void,” said Joe Spinelli, who heads trading in single stocks for the Americas at Deutsche Bank.
For some widely traded stocks, the cost of trading at different times of day can vary. An investor buying 800,000 shares of General Electric Co. between noon and 12:30 p.m. would face a trading cost of about $46,000, or 0.21% of the recent stock price, according to an analysis by brokerage firm ITG.
Trading the same amount between 3:30 and 4 p.m., by contrast, costs about $20,000, or 0.09%—less than half as much, due to the increased liquidity at that time of day.
While that fact has affected the way big money managers trade stocks, it has less bearing on retail investors, whose trades are usually too small to result in a noticeable difference in cost throughout the day. Trading costs have declined for retail investors over the years, though some market commentators say mom-and-pop investors are still unfairly disadvantaged in the stock market by the advent of high-speed computerized trading.
More than one in six trades in S&P 500-listed stocks took place between 3:30 and the 4 p.m. closing bell last year, according to an analysis by Ana Avramovic, trading strategist at Credit Suisse. The 17.8% of trades in that period compares with 13% in 2007.
For shares of smaller companies, 19.3% of trades were in the final 30 minutes, up from 14% in 2007. That is important because it can often be difficult for investors to trade smaller-company stocks without pushing the price up or down.
Even the closing minutes of trading have become more crowded. The final five minutes accounted for 6% of all volume last year, rising each year since 2010, according to Trade Informatics, a trading-analytics firm.
During the day, “people are watching the paint dry,” said Leonid Hmelnitsky, head of equities trading for Mellon Capital Management, a San Francisco money manager with $404 billion under management. “We’ve definitely seen the shift.”
Market liquidity has come into greater focus in the five years since the May 2010 “flash crash,” when the Dow plummeted 700 points over eight minutes before rebounding. Traders and regulators also have raised concerns about liquidity shortfalls in global bond markets.
For now, investors don’t see the migration in stock-market volume as portending another crash. Many say they are still able to get their trades done by buying and selling later in the day.
For some traders, it has resulted in once-rare luxuries, like lengthier chats with clients or an afternoon stroll. At around 3 p.m. one Wednesday in March, Justin Wiggs said he did something he rarely used to do during trading hours: He walked down the hall and poured himself a cup of coffee.
Mr. Wiggs, a stock trader at Stifel Financial Corp. in Baltimore, was trying to buy the shares of a small insurance company for a client. But the shares were barely trading.
So he left his desk for a spell, returning to finish the trade just before the closing bell. “The only real liquidity point is at the end of the day,” said Mr. Wiggs.
The shift began during the financial crisis, as the near-daily tumult in stocks left traders rushing to finish trades before day’s end to avoid getting caught off guard by overnight news, Ms. Avramovic said.
But a growing reliance on computerized trading tools has accelerated the shift. Such tools aim to lower costs and limit the impact money managers have on share prices. These include programs that dribble out trades at intervals, known as “volume weighted average price” algorithms. Their proliferation has led volumes to snowball at times when investors are already active, such as at the close.
“It just kind of feeds on itself,” said Joe Rodela, head of U.S. trading at Allianz Global Investors. “Volume attracts volume.” Mr. Rodela, who trades on behalf of portfolio managers at the $499 billion investment firm, said a greater share of Allianz’s own stock trades over the years take place later in the day. Trading later is cheaper and comes with less volatility, he said.
Another factor behind the shift has been the proliferation of passively managed investments, such as index funds. These funds aim to mimic an index, like the S&P 500, by owning the shares that comprise it.
Index funds don’t trade as often as active investors, but when they do, it is typically near the market close, traders say. That is because buying or selling a stock at its closing price better aligns their performance with the index they are trying to emulate.
Actively managed funds, in contrast, aim to beat, not match, stock indexes. As a result, these funds don’t feel the same pressure to trade late to capture a stock’s closing price—though they might do so for other reasons, such as to lower trading costs.
Over the last five years, investors have plowed $226.6 billion into passively managed stock funds, according to fund researcher Morningstar Inc. Over that period, they have pulled $467.7 billion from actively managed funds.
“The more indexing there is, generally, the more close-trading there will be,” said Paul Whitehead, who helps oversee trading for index funds at the $4.8 trillion fund manager BlackRock Inc.
With the trend has come concerns about liquidity in the multitrillion-dollar U.S. stock market. As more volume migrates to the end of the session, liquidity—or the ability to buy or sell stocks easily at a given price—is harder to come by during midday hours, traders said. That makes trading away from the end of the day more costly, making it harder for traders looking to capitalize on favorable midday stock moves.
Thanks for that... but there still was a catalyst that caused the AH volume- almost a million shares after the close. I could see that on options expiration, but no news?
In reply to this post by Ldfeat
Very informative post on stock market traders. Couple of months ago, took services of a renowned personal financial advisor Las Vegas for managing my finances. He really told and explained everything in detail.
|Free forum by Nabble||Edit this page|