Though equity volumes picked up late last year, liquidity providers believe volumes will continue in the doldrums for the immediate future. A panel of liquidity experts speaking at the Security Traders Association of New York conference on Thursday remained less than optimistic that volumes would return to the levels seen in the second half of 2011.
Greg Tusar, managing director and head of Goldman Sachs Electronic Trading, was particularly gloomy, noting that last year’s volumes were driven largely by volatility.
“I think volumes go lower from here before they go higher,” Tusar said. “As the VIX continues to collapse, I think there’s a good case we go below 6 billion, or even 5 billion shares a day.”
Matt Andresen, co-chief executive officer of Headlands Trading, echoed Tusar’s remarks. He said volumes were riding a secular tailwind for the better part of a decade, but that equity trading is much more efficient now. Volumes will probably be more correlated with gross domestic product in the future, he added, rising and falling with the overall economy.
As volumes have fallen, the trading business has become “Home Depot-ized,” according to Andresen. Like big box retailers, trading firms will have to offer everything, being active across all markets and asset classes.
Barriers to entry, in some ways, have fallen for trading firms. Still, a new shop has to trade all equities, as well as options and futures, Andresen said. They can no longer specialize in just a few dozen stocks.
Joseph Ricciardi, managing director of Knight Capital Americas, said the changes in the market have impacted how his firm acts as a liquidity provider. Knight now has to deploy considerable capital in the small-cap market, carrying its positions across multiple days.
“We’re having to wait two, three days for the stock price to come back,” Ricciardi said. “We’re also seeing retail liquidity drying up after a sharp move up as well as after a sharp move down.”
Ricciardi said investor confidence will not come back until macro conditions improve. Marty Mannion, chief operating officer for Citadel Execution Services, agreed, noting that the major indexes have effectively traded sideways for a long time, making many investors leery of the stock market.
