Institutional stock trading order flow is off as much as 50% from a year ago, some buy-side brokers say.
War, accounting scandals, terrorism, economic uncertainty, earnings concerns and a deflated Internet bubble have combined with the overhang from the 10-year bull market to push buyers to the sidelines. Institutional money managers have lost their appetites for stocks and are waiting for the market to stabilize and demonstrate some direction and clarity before churning out those buy tickets, according to industry insiders.
"Our order flow is down, maybe not 50%, but everyone is down significantly," said one New York Stock Exchange floor trader, who requested anonymity.
"Volume hasn't been that different, about 1.3 billion shares (daily). That's not great, but institutional orders are down. There is no visibility here. Everyone is measured against a benchmark and as a result, no one wants to make any big bets. Until they see something new and exciting, they (institutions) aren't making any big bets. They are waiting, that's what (the buyers) are telling me," he said.
Lagging institutional trading hasn't been reflected in overall trade volume on major exchanges, sources claim, because other players have continued to maintain order flow. Share volume on the Nasdaq was down during December 2001 to slightly more than 36 billion shares, from nearly 45 billion shares in December 2000. NYSE share volume was up during December to just 25.5 billion shares, from 24.2 billion in December 2000.
Institutional portfolio managers are more interested in preserving existing positions than adding to their positions, according to industry sources. That doesn't mean they are raising cash or not reinvesting new money, but large orders and major new stock ideas seem to have taken on less significance.
Robert A. Wilk, chief investment officer at Mellon Equity Associates, Pittsburgh, said shorter-term investors such as hedge funds, program traders, and index fund managers that are rebalancing remain involved in stock order flows, while long-term institutional investors seem to be sitting on the sidelines.
"Lower levels of activity on the part of institutional investors typically result in higher levels of volatility, and volatility usually creates opportunities for disciplined asset managers who can evaluate pricing in light of underlying fundamentals and long term valuations," said Mr. Wilk.
Institutional investors have turned cautious and temporarily lost their gusto for new stock positions, he said. Instead, they are concentrating on preserving capital.
"How has the market changed? We have had a series of events which have had a noticeable impact on the market - the deceleration of the economy, bursting of the tech bubble, Sept. 11 - a cascading chain of events, and now we are dealing with Enron and accounting issues," said Mr. Wilk. "All this has caused investors to stay on the sidelines. The reality is, as you go out to trade, the nature of the players is different than it was six months ago."
Mr. Wilk said institutional investors and their trading desks are "starting to take longer to make up their minds" and are "delaying making (stock purchase) decisions. They want to have all the information in front of them first." He said the Mellon trading desk reports "an absence of institutions" on either side of buy and sell activity for the last few months.
He acknowledged that there is usually a "concern of the day" that affects trading activity in any period. But, he said, "we have come through a significant downturn, we've come through a period of major unwinding, and all of a sudden we see a cloud of dust, terrorism, war, or, this time, the accounting issue." He said accounting problems associated with Enron and other companies have affected investor psychology at Mellon and across the investment horizon.
"We've spent a fair amount of time in the last two months discussing accounting issues, so you rethink and revise your due diligence in light of these types of issues," Mr. Wilk said.
Caution by traders isn't confined to U.S. equities; institutional traders seem to be waiting for a degree of clarity in global equity markets as well before boosting order flow.
"Certainly as far as the level of activity globally, I've never seen it this way in any part of the world," said Tom Perna, senior executive vice president-financial services companies at Bank of New York, New York. "It's just people trying to hang on and preserve their capital. They are waiting for the markets to turn around. They've had 10 years of nothing but up; for some buy-side traders, this is the first time they've seen anything like this."
Howard Crane, national practice director for Watson Wyatt Investment Consulting, Seattle, said he has seen "anecdotal evidence of people (traders) not willing to make decisions because there is no visibility in the market."
However, he said, it is more complicated than just major institutions holding off. Individual investors as well as 401(k) investors are "not rushing to get back" into equities after recent market turbulence, he said.
"Ultimately, there must be a risk premium for bearing more risk in equities. Historically, we've seen a higher risk premium than today," said Mr. Crane. "Equity ownership will be rewarded, but we're working through a lot of issues in the markets that get blown out of proportion. So people are rethinking their expectations and are changing their buying patterns and risk tolerance," he said.
Mr. Crane and others think current equity market conditions are more suitable for stock pickers. "Clearly there are market events that reward active managers and stock selection more than other periods; we are in one of those," he said. "We are in a market that rewards careful selection, avoidance of unrealistic expectations and unfounded earnings," Mr. Crane said.
Over the long term, Mr. Crane said the equity premium will return to normal. Watson Wyatt estimates that longer term, stocks will outperform bonds by 300 to 400 basis points. In the meantime, long-term institutional traders are cooling their heels.