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December 16, 2010

2010 Review: Volumes Down After Two Big Years

By John D'Antona Jr.

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  • 2010 Review: Volumes Down After Two Big Years

The U.S. equities markets have never been more efficient, but unfortunately for brokers, 2010 didn't translate into the best year to date for trading volume. And after all, trading volume and commissions are what keep the lights on, rents paid and traders--one hopes--well compensated.

In 2010, trading equities volume fell by nearly 14 percent from 2009 levels, as the market contended with a bevy of issues, including overall economic malaise, heightened regulatory scrutiny and the May 6 "flash crash."

To be fair, last year volumes rose slightly from the gangbusters level seen in 2008. But the rising trend did not continue. This year, investor confidence was shaken to the core by the events of May 6, and institutions lost their appetite for equities and migrated toward safe havens like fixed income securities and stockpiled cash.

According to agency brokerage Instinet, overall U.S. equity trading volume is down 13.6 percent for the first three quarters of the year.

"Institutions are content to just sit on cash or track an index," said Alison Crosthwait, director in global trading strategy at Instinet. "They need some sort of catalyst to get them trading."

And so far, nothing has emerged--such as wholesale change in the balance of power between the political parties, another financial market meltdown or severe change in the unemployment rate--to stimulate institutional trading, she says.

Also, retail investors, largely absent from the market since May 6, have been loath to put money into equities, and that has curtailed institutional interest. Given this relatively bleak picture, Crosthwait expects trading volumes to stay mired at current levels through early 2011.

Average daily share volume for the first 10 months of 2010 decreased almost 14 percent from the same period in 2009, according to data compiled by BATS Global Exchange.

Average daily share volume fell to 9.05 billion shares a day in 2010 through October. For the same period in 2009, the number was 10.5 billion.

Institutions, following the same pattern that began in 2009, continued to invest in the safety and security of the fixed income bond markets. Stock funds posted a net outflow of $11.6 billion in September, compared with an outflow of $16.5 billion in August, according to the Investment Company Institute.

The first nine months of 2010 saw a net outflow from all equity funds of $29.3 billion, compared with net outflows of $10.1 billion for the same period in 2009.

The ICI measures and tracks cash flows into and out of mutual funds. ICI collates data from its mutual fund members, which hold 98 percent of the industry's assets. This year, institutions shunned equities and placed their money into fixed income securities such as Treasuries or corporate bonds, or just held onto cash, industry sources said.

"Obviously, there are a lot of things on the table--such as future regulation and what exactly the Federal Reserve is going to do," said Mark Herman, trader at Tamro Capital Partners. "People are content to be patient."

Given the lethargic state of the market and proximity to the winter holidays, he wasn't willing to speculate just when increased trading volumes might return.

Lower volumes have also made it difficult for agency brokers to make money in equities trading. They have been forced to rethink business models, continue to keep costs low and, in some cases, consider merging with another firm to keep the lights on.