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Tim Quast
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May 1, 2011

Where's The Flow?

Execs Point to Potential Rebound

By James Ramage

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Equities trading volume in the first quarter disappointed many industry pros. However, they see several bright spots that could juice volumes the rest of the year. First, the bad news. On March 28, just 5.973 billion shares traded. It was the slowest day in the markets this year. It also wrapped up a quarter that saw a 7 percent drop in volume last year. 

Michael Lynch

What disappoints the industry is that the first quarter typically has been the most active for the year over the past few decades. No doubt about it, the equities markets are down, said one trader at a large bank. "From a trading standpoint," he said, "we see volumes down, just like everyone else."

And they're down more than the industry expected. So much so, in fact, that some have lowered their trading volume estimates for the rest of the year.

"I think the fear in everybody is: If this is what we see the Monday of the last week of the first quarter, then what will we see in the middle of the second or third quarter?" said Michael Lynch, head of Americas equity execution services at Bank of America Merrill Lynch.

Here's what the numbers say: By the end of March, a daily average of 7.9 billion shares has traded so far this year. That's a decline of 7 percent from the 8.5 billion shares ADV that traded last year. And it's a drop of almost 20 percent from the market high ADV of 9.8 billion seen in 2009.

Why has this happened? Shouldn't equities volume climb higher? Given the key factors and trends affecting the markets, the answer is no. Less market volatility and fewer active players in domestic equities these days have all boiled down to a period of lower volume.

Lower volatility in the marketplace is a big factor. Volatility greatly influences volumes, as traders find more opportunities for profits when prices whipsaw. And the financial crisis triggered the epic volatility that pushed volume to record levels in 2008 and 2009.

But the financial crisis also introduced a high degree of uncertainty, as banks faltered and the federal government had to step in to save them. No such shocks to the financial system exist today.

Indeed, there have been no structural drivers-such as those seen in 2008-to propel volatility and carry volumes to the same levels. Even events such as the conflicts in northern Africa and the earthquake in Japan only raised volatility and volume for short periods of time, said Eric Noll, speaking on a recent panel at the Security Traders Association of New York's annual gathering.

Besides low volatility, fewer market players have been active trading domestic equities. This includes long-only investors, hedge funds, high-frequency traders and other short-term alpha types.

 

Hedge Funds Cut Back