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December 8, 2009

2009 Review: Volume Up, but Institutions Sidelined

Washington Strikes Back

By James Ramage

Many in the industry wondered at the outset of the year how far share volume would fall after 2008.

Last year saw record volumes amid the start of the financial crisis. When the market crashed, many believed that history would repeat itself and stagnation would follow, as shell-shocked investors would remain on the sidelines.

In some respects, their fears were misplaced, as trading volume is on pace to rise this year over last. Go figure. But average daily share volume for 2009 through October increased 16 percent from 2008, according to data compiled by BATS Trading.

"Given the market conditions, most people would say that volumes hung in there, maybe better than initially expected," said Michael Adams, an associate analyst with Sandler O'Neill and Partners.

Bill O'Brien, chief executive at Direct Edge, agreed, adding: "This time last year, everyone was concerned that after the crisis and panic ebbed, there'd be a sharp decline in volumes. And that didn't really happen."

Average daily share volume climbed to 10.2 billion shares a day in 2009 through October. For all of 2008, the number was 8.8 billion shares a day.

The surge in share volume that the industry experienced late last year continued into early 2009, with more than 11 billion shares per day on average trading through May. Volatility, as measured by the Chicago Board Options Exchange's Volatility Index--or VIX--was also still high, registering in the 40s.

The markets are generally considered volatile when the VIX tops a measurement of 25. Starting in the May-June period, however, volatility started to ease and volume to decline.

Shares traded fell roughly 14.5 percent in June, or by about 1.6 billion shares per day. They remained in the 9.2 billion range for the next four months.

But upon further review, this year was more complicated than simply one of higher trading volume. A significant amount of the trading was done in battered financials and other low-priced stocks. Sources believe that such trading was likely done by high-frequency traders and retail. Anecdotal evidence and data suggest that institutional investors were a smaller presence in the market this year.

Average daily dollar volumes tumbled by about 24 percent in 2009 from the previous year. They averaged roughly $225 billion for 2009 through October, according to BATS's data. By comparison, 2008 saw daily dollar volumes average around $295 billion, according to Nasdaq data.

The drop reflects a fall in the average price of a stock, which is consistent with the decline in the major indexes. The S&P 500 stood at 918.90 in late June of this year, 28 percent below its level of 1,278.38 a year prior.

A significant drag on dollar volume, however, was the busy trading of low-priced stocks, including many financials. According to figures collected by Sandler O'Neill, financial sector stocks such as Citi, Bank of America, Freddie Mac, Fannie Mae, CIT Group and others comprised an ever-growing percentage of total volume in 2009.

In fact, those particular names were the top five most heavily traded in August, and totaled 32.3 percent of all traded volume--or an ADV of 1.883 billion shares. Citi alone traded an average of 1.088 billion shares a day for the month.

Who was trading them? Mostly retail and high-frequency shops.

"Institutions aren't transacting in Freddie and Fannie at $1; they're long gone from these names," said White Cap Trading's Jamie Selway.

Institutions, meanwhile, largely snubbed U.S. equities and invested more heavily in the bond market. Combined flows into and out of domestic equity mutual funds through September show that institutions did 26.6 percent less trading than they did a year earlier, according to Investment Company Institute data. Gross flows totaled roughly $1.15 trillion through the first nine months of this year. That compared with about $1.56 trillion through the first nine months of 2008. (These figures exclude intra-fund transfers, or exchanges, which are relatively de minimis.)

The ICI tracks cash flows into and out of mutual funds. ICI draws its figures from its mutual fund members, which comprise 98 percent of the industry's assets. Instead, institutions put their money into international equities and into the bond market, industry pros said.

"To the extent that there were inflows, it was a big year for bond funds, a relatively big year for foreign equities," Selway said. "The institutional business has not had a good equities year."


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