TOP STORIES 2012: Trading Volume Continues to Fall, No End In Sight
Traders Magazine Online News, January 2, 2013
The dramatic drop in the trading volume of U.S. stocks continued to be one of the biggest stories of the year, notable not only for what it meant in its own right, but also for the corresponding impact it had on virtually all other major stories of the year. Layoffs, crushed brokerage commissions and shuttered trading desks all had their roots in the decline of trading volume that has gripped the industry over the past three years.
Volume has been dropping consistently since the onset of the financial crisis. Worse yet, it shows no signs of improvement. The decline is deeper and longer-lasting than the market experienced following the dotcom crash in 2000 and the overall market crash in 1987.
To illustrate this downward slope, one only has to isolate any given month. If you look at September, for example, the average daily volume in 2012 was about 6.5 billion shares traded per day, according to data from Nasdaq OMX. That is down more than 42 percent from the average daily volume in September 2008 of 11.3 billion shares. Average daily volume in September has dropped steadily in three of the past four years, and this year’s total is the lowest it’s been since 2008.
And it’s not just a September phenomenon. You’d have to track back to October 2011 to find a single month that posted a better average daily volume than the previous year. That is a slow grind, a death by a thousand cuts, each representing another slow day of trading.
Two negative trends among asset managers have had a strong hand in driving volume lower—allocation and turnover. Simply put, portfolio managers across the board are buying fewer stocks and not trading out of much of what they do own.
Want one example? Ford Motor Co., which manages about $60 billion in defined benefit plan assets, allocates a combined 42 percent of its portfolio to U.S. and foreign stocks. In a filing earlier this year, it said it would cut that figure to 30 percent over the next few years. That move alone takes an additional $7.2 billion out of the equities market. Also, new rules from regulators sped up how loss recognition is recorded for accounting purposes, and this has made many funds unwilling to endure the stock market’s ups and downs.
Turnover, the trading of stocks within a portfolio, also has declined along with the volume slowdown, greatly contributing to it. Turnover peaked in 2009 and has been declining ever since.
Whatever the cause of the volume drop, of course, there is one ultimate victim—brokerage commissions. In its midyear report, Greenwich Associates noted that brokerage commissions have declined dramatically, falling 22 percent since 2009. Greenwich's 2012 U.S. Equities Investors Study, which tracks brokerage commissions paid by U.S. institutions on domestic trades, showed brokerage were paid $10.86 billion between 1Q 2011 and 1Q 2012. That represents a three-year decline from a 2009 peak of $13.95 billion.
So, when will this dismal stretch end? Not in the foreseeable future, said Mark Kuzminskas, director of trading at Robeco Investment Management. “Right now, there is such a tight correlation between stocks and the macroeconomic characteristics of the overall economy—like Central Bank intervention and the slow global economy—that it drags on volume,” Kuzminskas said. He added that additional factors, like the proliferance of exchange-traded funds, also have siphoned off volume from stocks.
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