Buy Side Eyes ‘Summer Malaise’

Terry Flanagan

As U.S. stock and bond markets move into the traditionally quiet summer period, institutional asset managers are prepared for lighter volumes, or perhaps a repeat of last summer which saw volume spike.

“Historically, trading has almost always been slow during July and August,” said Steve Hedger, managing director of trading and investment operations at Fifth Third Asset Management in Cincinnati. “I have always described this as the ‘summer malaise’. This is not always the case, and traders are always cognizant that trade volumes can peak at anytime.”

With $15 billion under management and 34 investment professionals as of March 31, Hedger said Fifth Third has the size and scale to adjust if a market might quickly from quiet to busy. “I think this might be harder for smaller firms that may not have committed appropriate resources,” he said.

To be sure, the prospect of a chaotic summer means different things to institutional asset managers such as Fifth Third than it does for a proprietary trading firm or a hedge fund that deploys short-term strategies. Busy markets are the bread-and-butter for the latter group, but such an environment may or may not hold implications for the former group.

“Just because there might be heavy trading volume in the broader markets, it does not always translate to investment decisions being made by our portfolio managers,” Hedger said.

This year has so far tracked 2010 and 2011 in starting robustly and then having that peter out in the second quarter amid macroeconomic concerns. Second-quarter banking and trading revenue at Bulge-Bracket banks declined by about 30% compared with the first quarter, according to some industry estimates.

A lower-volume, less liquid market isn’t a concern for true buy-and-hold investors, but the preponderance of institutions running actively managed portfolios trade at least occasionally. So a slow market means less-efficient, higher-cost trades.

Institutional investors also face trading challenges pertaining to market fragmentation, as less volume spread out over more trading venues results in lower liquidity at individual venues, on average. The potentially problematic situation has been pointed out by exchange and trading executives such as Daniel Coleman, chief executive of high-frequency trader Getco.

“Increasing competition without ensuring stability leads to highly efficient markets without a purpose that are overly complex and fragmented,” Coleman told a U.S. House committee in June.

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