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December 5, 2008

Volume: Will History Repeat Itself?

By Peter Chapman

The stock market collapse this year, which saw the Standard and Poor's 500 Index lose a third of its value in two months, was accompanied by a surge of volume and volatility that meant busy days and fat profits for broker-dealers.  (See chart: "Volume Through the Years" at end of the story.)

Average daily share volume during the months of September and October was 11.3 billion and 12.2 billion shares, respectively. That compares with 7.8 billion shares for the first eight months of the year.

The Chicago Board Options Exchange's Volatility Index, or VIX, soared from the low 20s in August to over 80 in October.

If history is any guide, however, the trading world could get a lot quieter. The market routs of 1987 and 2002 were also accompanied by sharp spikes in volume and volatility, but both metrics soon subsided. In both instances, it would be three years before volume picked up again in any meaningful way.

In October 1987, the S&P 500 fell nearly 30 percent in a matter of days. During the next two months, volume on the New York Stock Exchange and Nasdaq averaged about 380 million shares per day. That was up from 330 million shares per day in the months before the crash.

By 1988, however, volume went into decline. It stayed mostly flat at about 300 million shares per day until beginning its climb in 1991.

In 2002, during a one-month period in June and July, the S&P 500 fell more than 20 percent. Trading in NYSE and Nasdaq securities averaged 3.9 billion shares per day, up from 3.1 billion in the first half of the year. The VIX hit 44 in July, double where it had been earlier in the year. By August, however, the party was over. Growth in share volume stagnated, hovering around 3.2 or 3.3 billion shares per day until 2005.

In both cases, the S&P 500 began its recovery within a year of its collapse or two years before volume did.

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Volume Through the Years