Source: FT Alphaville Falling daily trading volumes: not so mysterious?

Falling daily trading volumes: not so mysterious?

Posted by Cardiff Garcia on May 15 18:47.

Kid Dynamite made a good point in the comments of our post on Monday about falling daily US trading volumes: they could just be a correction to the churning frenzy that took place during the crisis, not necessarily a signal that volumes are destined to keep falling perpetually.

And at the end of the first quarter this year, Barry Ritholtz posted this excerpt from a Bank of America Merrill Lynch note (hat tip to Tim Duy for sending it our way):

Quoting 

“There has been concern that volume is not supportive and we disagree with this view. Average daily NYSE consolidated tape volume year-today in 1Q12 is down 14% vs. 1Q11 and down 38% from peak financial crisis average daily volume in 1Q09. Since 1Q09 peak volume was associated with extreme bearish sentiment during the financial crisis, 1Q12 volume should not be compared to 1Q09 levels. Average daily volume in 1Q12 is 36% higher than it was in 1Q07, which was prior to the financial crisis and also a period when the US equity market was rallying to new recovery highs. Taking this into consideration suggests that volume may not be as low as it seems…”

As we mentioned, Credit Suisse Trading will soon release a report arguing that stock prices have an inversely correlated (causal?) relationship to trading volumes, and we look forward to reading it.

But it could well be that we need a few more years of data to know whether volumes are in secular decline.

Other factors that move equity volume down:

1. Flight of US investment overseas
2. End of the great big projects, bridges, highways, power plants. Need is drying up.
3. End of innovation, aside from iPads and Facebook, is anything new coming out? Go to best buy, its the same old stuff. Microsoft is out of good ideas to steel and intel is just stuffing more cores into the same 3GHz chip they made 10 years ago. Drug companies are out of home runs and biotech is a bust.
4. Baby boomers spending their money that previously was invested - its all going to healthcare and vacations.
5. Money that evaporated in the housing bubble is gone forever, since it was just made up money by banks.
6. The commodity bubble Gold, currencies etc. we buy stuff not companies.
7. We are finally driving less, moving to retire in the burbs and get by with one 4cyld car per household. Young drivers are starting later due to fuel and insurance costs.
7. The large institutions playing synthetic instruments like futures, CDOs and Options. Who is left to buy IBM stock.
8. Tighter credit from banks under new rules.
9. Fake Volumes 1990 - 2005 were way high compared to the pre1990 volume, some of the HFT are shutting down.

It was mentioned earlier in the thread that retail flow is not what drives volumes and I fully agree. HFT is distorting the overall picture as without their pointless liquidity providing volumes would be even lower.

The main driver of volumes are the big players which don't need to be named...The fact is that with regulatory reform coming in their equity capital will not be sufficient to run the traditional Investment Banking operations. Certain types of operations will become unprofitable and thus will be discontinued due to increased collateral requirements. The banks are de facto being castrated and right now are taking stock as to which operations would still be profitable under the new capital requirements imposed. One of these operations which will be subject to higher regulatory capital requirements will be the traditional business of stock trading and lending.

The regulators are coming....slowly...but they are coming....


Just my two cents thrown into the conversation....

Oh and as an aside, during the great depression exchange volumes declined by 90% from their peak...