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Light volume exaggerates stock movements

News is slow and volume is light--the smallest announcement or event can have an exaggerated impact on a stock.

Tech Industry
A little news can go a long way this week.

Shares in Commerce One, Yahoo, Qualcomm and others registered large price swings this week. The reason: News is slow and volume is light.

As a result, the smallest announcement or event can have an exaggerated impact on a stock.

Yahoo, for example, announced Monday that orders from its shopping site rose more than 385 percent between Thanksgiving and Christmas, compared with last year. The stock immediately sank, then soared, posting a price swing of more than 13 percent from the valley to the peak.

Shares in Commerce One rode the roller coaster yesterday, a day after the typically benign event of a 3-for-1 stock split became effective. Also boosted by some positive analyst comments, Commerce One shares climbed more than 20 percent to above 311 before plunging later in the day to close at 250, a loss of 6.44. Shares closed today at 209.94, down 40.6.

A PaineWebber analyst today said he expects Qualcomm stock to double within a year. Investors immediately jumped on the news, sending Qualcomm shares up 107 to 610, or nearly 25 percent, in midday trading. Shares closed at 659, up 156.

Also today, shares of Accrue Software, a developer of software that analyzes Internet traffic, jumped nearly 50 percent after a columnist on an investor site named the stock his best pick.

The broader markets also have seen large swings in short periods. The Nasdaq was up more than 40 points throughout most of yesterday, apparently cruising toward its first close above 4,000. Just prior to the market close, the Nasdaq stumbled and posted a small loss. But today it broke 4,000 for the first time.

"Most of the professional investors like portfolio managers have already gotten out of the market for the year, so that's why it's more volatile," said Safa Rashtchy, an analyst at US Bancorp Piper Jaffray. "So you have day traders, who typically don't have access to analysts' full reports, take good but insignificant information and think it's a huge deal."

Rashtchy said he would account for half of Yahoo's gains on Monday to the volatility created by the light trading volume. The Nasdaq, for example, had volume of 129 million shares on Monday, compared with daily volume of 200 million to 300 million shares in the week before Christmas.

Linda Kendall, vice president of education for electronic day trading firm RML Trading, said small-cap stocks generally tend to get a larger swing from insignificant news on days of light trading.

Meanwhile, one trader noted that this holiday season and the volatility it brings may weed out those traders who are faint of heart.

For day traders, the volatility can be too much of a good thing.

Day traders feast on volatility, but at narrower spreads, said Joe Gruender, a full-time day trader who uses the facilities at Pacific Day Trading in San Jose, Calif.

"Scalpers look for spreads of 0.0625 and most traders look for spreads between 0.375 to 0.625 of a point. Only those traders who are confident and know what they're doing seek out 1-point spreads," Gruender said. Scalpers hold stocks for a very short time, conducting many trades in a day, and are willing to accept very small gains.

Meanwhile, market makers work for brokerage firms and are responsible for buying and selling shares for their firm's account or their firm's client's account. When volume is low, Gruender and Kendall noted market makers push for wider spreads between the bid and ask in the hopes of capturing a larger profit.

And Kendall noted: "Market makers are also able to manipulate stocks a little more in light trading days because they're able to move them around more easily than heavy volume days when more electronic traders are in the market."

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