Investors Gravitate Toward Liquidity

Terry Flanagan

Large investors like large companies, according to a study by brokerage firm Abel/Noser. The analysis, which examined public filings with the Securities and Exchange Commission, showed that institutional investors concentrated their holdings in a small number of highly-liquid, mega-cap stocks during the fourth quarter of 2013.

“Nearly five-and-a-half years after the great financial crisis of 2008, liquidity is still king,” said Bill Conlin, Abel/Noser’s president and CEO, in a statement. “Despite the run-up in the S&P 500 over the past few years, and even as small-caps trade at more compelling valuations, institutional investors remain skittish about putting money into stocks they can’t get in and out of easily. Traders need to be extra vigilant when taking a position in names outside of the top 50.”

Professional money managers held nearly one-quarter of their portfolios in just 40 stocks out of the 13,000 listed companies in the U.S. The five most held stocks by institutions were Apple, Google, ExxonMobil, Microsoft and Wells Fargo. The analysis was compiled from 13-F filings for the quarter ended December 31, 2013, the most recent quarter for which data is available.

Companies with large institutional ownership accounted for a disproportionate share of the market’s trading volumes. In March, the 600 most liquid stocks represented 75% of all the dollars that traded daily during that time period.

“Fragmentation in the marketplace is creating the difficulty of achieving best execution,” said Roger Post, executive vice president at Transaction Auditing Group (TAG). “That fragmentation goes to finding liquidity as you’re talking about illiquid stocks. I would say we see that in all asset classes.”

TAG, a provider of trading compliance products covering order routing and quality of execution, has a platform, Meteor, which allows clients to create custom reports to analyze and view their data on demand. “It’s a customized product where you can slice and dice your order flow and see where it went and how it was executed,” Post said.

SEC Rule 605 requires market centers that trade national market system securities to make available to the public standardized, monthly reports containing uniform statistical measures of execution quality. SEC Rule 606 requires broker-dealers to disclose venues to which they route non-directed orders. It also requires broker-dealers to disclose the nature of any relationship they have with those venues, including any payment for order flow arrangements.

“The challenges for clients is to be able to view everything in one place, which goes beyond just being in compliance with 605 and 606,” said Post. “It’s similar to what they’ve been doing in clearing, which is to see everything on one dashboard.”

Abel/Noser also compared the 13-F filings to stock market liquidity during March. A stock with high trading volume but comparatively lower institutional ownership typically indicates that it has a strong following among retail investors. Retail investors last month gravitated towards companies in the technology and consumer industries.

“Retail investors, following the advice of Warren Buffett, have long been known to buy companies they know and understand,” said Conlin. “Abel/Noser’s survey shows that trend is in no danger of slowing down. The stocks with strong retail interest feature well-known, recognizable brands in industries that the average person comes into contact with on a daily basis.”

Featured image via scottkevin27/Lightstock

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