Volume dries up as traders, investors seek direction

NEW YORK -- It's awfully quiet out there.

The New York Stock Exchange, where more than a billion shares changed hands every day in March and April, has seen volume return to the far more modest levels of last year, when average daily volume was 809.2 million.

On the Nasdaq Stock Market, where daily volume earlier this year routinely topped 2 billion shares, the turnover has waned, too. On May 8, the quietest day of the year, just 1.11 billion shares were traded.

The decline in volume has rattled some investors, who fear they may not get the best prices for their trades in a market that's shorter on players. But Wall Street professionals are taking the slowdown in stride, calling it a return to normalcy following the supercharged action that dominated Wall Street in late 1999 and early 2000.

Analysts cite two clear causes for the sluggish action on Wall Street. Primarily, investors are becoming unnerved by the Federal Reserve's continuing string of interest-rate increases and many have opted to stay out of the market until the Fed stops raising rates.

The Fed's half-percentage point interest rate increase, announced Tuesday, was the sixth since last June. It was also the steepest, and appeared to convince investors that the Fed is willing to abandon its policy of small, gradual rate hikes and raise rates as steeply as necessary to cool the economy.

''As recently as December, there was still some feeling that there might be a Y2K-induced slowdown in the economy,'' said Jim Weiss, deputy chief investment officer for equities at State Street Research and Management Co. in Boston. ''But the momentum in the economy in the first quarter was stronger than most anybody predicted, and that leads us to believe that the Fed will have to be aggressive.''

It isn't just inflation-wary investors who are on the sidelines. Analysts say many day traders are gone, too, knocked out of the market by the Nasdaq's big tumble in April. Those short-term investors had dramatically pumped up volume with their rapid-fire trades during the height of the bull market.

''Nasdaq volume toward the end of last year was based, to a certain extent, on the gamblers,'' said Kenneth M. Sheinberg, head of listed trading at SG Cowen Securities in New York. ''The day traders were not investing in the market, but gambling. Some of them are gone, and some others learned their lesson.''

Market analysts point to one clear indication that speculative investors have backed out of the market. Margin debt, the use of borrowed money to buy stocks, fell in April after climbing precipitously throughout the 1990s.

Customers in the New York Stock Exchange's member firms had $251.70 billion in margin debt in April, down from $278.53 billion in March. Analysts expect a further decline in May.

In an ideal situation, the easing of margin debt could convince the Fed that the stock market has lost its speculative excesses, said Greg A. Smith, chief investment strategist at Prudential Securities.

''Hopefully, the tumble in margin debt will please the Fed,'' Smith said. ''For this particular form of consumer borrowing to show a decided drop is certainly encouraging for the future.''

Even without the day traders, the margin buyers and the Fed watchers, volume isn't exactly dead. In fact, volume is up about 100 million shares per day from May 1999. Sheinberg said the voices lamenting the current slowdown are overlooking the fact that volume remains at historically high levels.

''We had a blowout situation at the start of the year,'' he said. ''This is getting us back to a more normal range.''

Volume is likely to ebb further come summer, typically the slowest season on Wall Street. But by fall, when many analysts expect the Fed to be finished raising interest rates, trading activity will probably pick up.

''We'll see some choppy action getting there,'' Weiss said. ''But ultimately, it will be a healthier market.''

This past week, the Dow Jones industrial average eked out a gain of 17.58 points. The Dow fell 150.43 on Friday, closing at 10,626.85.

The Nasdaq sustained the steepest losses of the major indexes, falling 138.66 for the week. On Friday, the index tumbled 148.31 points to close at 3,390.40.