Buy side trading

interesting article which may help provide some perspective

http://online.wsj.com/article/SB122445525957248373.html

text pasted below:

Volatility Requires New Strategies Individuals Redeeming Mutual Funds Have Helped to Choke Off Rallies

By TOM LAURICELLA The stock market's collapse and unprecedented daily price swings are forcing investors of all stripes to rethink their strategies, all the while looking for any hints that the financial markets will finally stabilize.

That includes the 13 traders at mutual-fund company Lord Abbett & Co. whose job is to buy and sell stocks for 23 of the firm's mutual funds. At companies like Lord Abbett, traders are responsible for getting the best possible prices for the stocks that the fund managers want to buy and sell, and a good trader can significantly boost a fund's overall performance.

But in markets like the ones of the past few weeks, the traders' jobs get a lot tougher and more crucial. So far this month, there have been 10 days where the Dow Jones Industrial Average ricocheted in a range of more than 5%, including Friday's session, when the Dow ended down 1.4% in a selloff just before the closing bell. With that kind of volatility, buying an hour too early or too late can mean the difference between a profit and a loss on the investment

Last Thursday, stocks were poised for a strong opening after an 8% plunge in the Dow the day before. Standing on the trading floor of Lord Abbett's headquarters in Jersey City, N.J., head trader Ted Oberhaus summed up the firm's early outlook: Glimmers of positive developments in the credit markets suggested that the extreme volatility in stocks might finally subside.

But for the time being, he said, "One thing we've learned in this market is to sell the rallies."

One reason that traders like Mr. Oberhaus have been bearish is that individual investors redeeming their mutual-fund holdings has played a role in cutting off rallies. The funds need to sell in part to cash these people out. Like virtually every mutual-fund company lately, Lord Abbett has seen investors pull money out of its stock funds, which hold about $60 billion, and move to bonds or cash.

Lord Abbett's desk, made up of traders with many years of experience, could buy and sell anywhere from a few hundred million shares to upwards of a billion shares in a day, depending on the instructions from fund managers and market conditions.

In the opening seconds Thursday, stocks popped higher and Lord Abbett's traders, who had readied their sell orders electronically, let loose some stock into the rally. A groan rose from the group at 10 a.m. as a round of bad economic news hit the tape. The market's gains quickly evaporated and the traders, staring intently at their screens and listening to financial news on television, slowed their selling as prices fell.

Timothy Crimmins, a senior equity trader, had been standing up at his desk, swinging his arms back and forth, watching the electronic stock-price quotes turn from green to red as gains turned to losses. "This thing fell out of the ugly tree and hit every branch on the way down," he said.

Then, shortly before noon, word spread of a potential big buyer of stock options and the market began a recovery that picked up speed during the late afternoon.

In recent sessions, the final hour of trading has often featured massive price swings. For Mr. Oberhaus and his team, bursts of trading volume are a chance to go against the tide. That has resulted in a smile-shaped pattern of trading, with an emphasis on buying or selling at the open and close, with less activity in the middle of the day.

For buy orders in a declining market, the Lord Abbett traders scale the buys in, filling a bigger percentage of the order as the price drops. For now, at least, there's been little reward in buying when stocks are moving higher.

At Thursday's close, a rush of buyers jumped into the market. Purchase orders were stacked up, looking for sellers like airplanes circling an airport waiting to land. When the buy-order backlogs appeared, the traders immediately emailed word to portfolio managers in case they saw a chance to sell at an attractive price.

Friday morning was different. Lord Abbett's traders were greeted with a round of sell orders from their portfolio managers. All over the market, a big backlog of selling awaited the opening bell. The debate was whether to sell aggressively at opening prices.

One consideration was that already-volatile trading could be magnified by that day's expiration of stock-options contracts, which can result in seemingly random waves of buying or selling. In that environment, "if you don't like the price, just wait five minutes," joked Mr. Oberhaus. The Lord Abbett traders decided to see if a better opportunity to sell would present itself.

Sure enough, the rush of selling at the open was absorbed. The market moved higher through midday, topping out more than 6% up from its early lows before collapsing again in the final minutes, to end down 127.04 points at 8852.22.

Lord Abbett's traders, though, got most of their selling done when the Dow was between 9000 and 9200. The traders were exhausted, Mr. Oberhaus said, but "the strategy of selling the rally seems to continue to work."

If the stock markets can become a little less volatile, Mr. Oberhaus said, they will spread out their trading more evenly across the day. "You've got the seeds at least for improvement in the credit markets, and that's what we in equity-land want to see," he said.

With the help of aggressive efforts by the Federal Reserve and central banks around the globe, there has been an improvement in a key barometer of banks' willingness to lend, the London interbank offered rate, or LIBOR. Meanwhile, yields on U.S. Treasury bills have edged higher, suggesting some lessening of the extreme risk aversion seen among investors.

But, Mr. Oberhaus cautioned, investors aren't yet focusing on the fundamentals of the stock market. "Anytime you've got people in equities talking about the credit markets, it's still not a great environment for equity appreciation," he said.

Write to Tom Lauricella at [email protected]