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Mutual Funds Trade Heavily in Market Turmoil

When a million-share trade comes through the system at the Liquidnet trading floor, it triggers a sound effect in the form of a bugle call. During the market meltdown over the last couple of weeks, they've gotten used to the bugle sounding several times a day.

Mutual-fund portfolio managers have dramatically stepped up their trading activity in August, in some cases pressured by customer fund withdrawals, as the stock market's volatility has worried investors.

"There are those institutions that see major buying opportunities today," said Liquidnet CEO Seth Merrin. "And there are those institutions that are being forced to sell or want to reallocate their funds somehow."

An electronic marketplace solely for institutional investors, with close to 650 mutual fund and long-only hedge fund members, Liquidnet matches buy and sell orders between funds, in the process helping to insulate fund managers who need to execute large trades from the volatility caused by high-frequency traders, who move in and out of stocks to exploit price movement, sometimes in a matter of seconds.

The firm has seen its daily trading volume double the average of about 50 million shares a day it saw during the first half of the year. And in the last two weeks, the volume has been just as strong on up days as during market declines, for both U.S. and international fund trading.

"It’s quite frankly all over the globe," said Merrin. "We are seeing tremendous volatility in both our European and our Asian [markets], and also huge spikes in volumes in those regions, as well."

Merrin says the severity of the market pullback, and the spike in bearishness, may mean equities could be close to seeing a market bottom. But there's no telling how soon.