Program trading
pressures market

Traders blame computers for volatility,
but not for losing streak

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By Lisa Singhania
Associated Press

NEW YORK >> Stocks have fallen into a frustrating pattern of drifting throughout the trading day, taking direction only late in the session with sharp swings in either direction. Traders say the bursts of volatility come from program trading -- computer programs that buy or sell tens or even hundreds of thousands of shares at a time.

That doesn't mean that program trading is responsible for the market's four-week losing streak, however. Rather, its influence has been exaggerated by the absence of enough buyers to counter its effects.

"Program trading is not driving this market lower. It's corporate profits, unsettling terrorist attacks and corporate scandals," said Stephen Massocca, president of Pacific Growth Equities. "But if you've got low volume on a slow day in the market and you have program trading, the effect is going to be exacerbated. If it were a busier market, the fact that a sudden burst of orders comes to the market would have less of an effect."

Still, program trading levels on the New York Stock Exchange are higher than a year ago. For the week ending June 7, the most recent data available, program trading accounted for 28.4 percent of daily volume, compared to 24.9 percent at about the same time in 2001.

The disparity was greater last month. In May 2002, the weekly data ranged from 30.6 percent to 39.4 percent. A year earlier, the same figures ranged from 25.3 percent to 31.2 percent. The NYSE defines program trading as the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more.

Some of the increase is because overall volumes have fallen as individual investors have pulled back from the market, adding to the typical summer slowdown. There's also the fact that a lot of institutions, whether they be mutual funds, pension funds or other big accounts, are rebalancing their portfolios for what many fear are more disappointments ahead.

Although second-quarter corporate earnings are due out in July are expected to show some improvement from the previous quarter, there is growing concern on Wall Street that the numbers won't be strong enough to persuade investors that its safe to buy. In the past 10 days, Intel, Lucent, Safeway and Monsanto -- to name a few -- have warned that results will be lower than expected.

Investors also got fresh reminders of the corporate scandals that have engulfed Wall Street for months now. ImClone's former chief executive was arrested Wednesday on insider trading charges. The week before, Tyco International's former chairman and chief executive resigned a day before he was indicted on tax evasion charges.

The prospect of more terror attacks further frayed nerves. Yesterday, at least 11 people died after an attacker crashed a bomb-laden vehicle into a guard post outside the U.S. Consulate in Karachi, Pakistan.

"You're seeing a lot of people move into the value sector, into more defensive stocks and out of technology," said Michael Murphy, head trader at Wachovia Securities. "But to blame program trading for all of this would be to just look for an excuse.

"What we're seeing here is a buyer's strike. The market needs some good news and it's not getting it."

The market's major indexes ended the week lower.

The Dow Jones industrial average fell 115.46, or 1.2 percent, for the week, after declining 28.59 to 9,474.21 yesterday.

The Nasdaq composite index had a weekly loss of 30.74, or 2.0 percent. Yesterday, the Nasdaq rose 7.88 to 1,504.74.

For the week, the Standard & Poor's 500 index fell 20.26, or 2.0 percent. Yesterday, the S&P declined 2.29 to 1,007.27.

The Russell 2000 index, which tracks smaller company stocks, had a weekly loss of 11.44, or 2.4 percent. Yesterday, the Russell rose 3.09 to 459.07.

The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $9.549 trillion, off $202.97 billion from the previous week. A year ago, the index was $11.238 trillion.