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Stock Exchanges Hit New Highs Even As Volume Wilts

Thursday, 14 Mar 2013 | 5:30 PM ET
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Stock exchanges hit new highs even as volume continues to wilt: what happened to volume?

It's a bit of a surprise, but all the stock exchanges are at 52-week highs: New York Stock Exchange (NYX), IntercontinentalExchange (ICE), Nasdaq (NDAQ), CBOE (CBOE), and CME (CME).

What's up? CBOE did announce they had again locked up an exclusive 14-year deal for the S&P 500 options contract (their biggest single contract--30 percent of their earnings), and this will likely make CBOE a takeover target.

Who would buy them? Nasdaq, NYSE/ICE, Deutsche Boerse maybe.

And you might be able to argue traders are starting to understand the positive synergy in the NYSE-ICE deal.

Still, the new highs are a big of a surprise to me, because--at least in the case of the stock exchanges--volumes are still a primary driver of the business, and volumes continue to decline.

What happened to volume?

It started exploding around 2006 as high frequency trading (HFT) kicked into high gear, but after hitting historic highs in 2008 (the financial crisis unleashed titanic volume), volume again started to decline.

What happened? Lower volatility (a byproduct of activist central bank intervention) has meant less trading opportunity for HFT firms, and second the rise of exchange-traded funds (ETFs) made it easier to buy large swaths of the market without having to buy the underlying stocks.

According to Patrick O'Shaugnessy at Raymond James (RJF), average daily volume on all stock exchanges has been 6.4 billion shares for the first quarter of 2013; in 2012, it was 6.8 billion shares, a decline of six percent. And 2012 had lower volume than 2011.

His conclusion: 2012 had the lightest volume since 1999.

Here's daily average trading volume for several years, once high frequency trading and ETF trading is stripped out:

  • 1999: 2.1 Billion
  • 2007: 3.6 Billion
  • 2008: 3.7 Billion
  • 2009: 3.4 Billion
  • 2012: 2.7 Billion


Why is volume dropping with the trading community? You can offer many explanations:

  1. High frequency trading discourages other types of trading (odd claim since HFT is down as well)
  2. Lower volatility has also lessened volume from "trend followers"
  3. The 2008 financial crisis has greatly reduced the public's appetite for stock trading; a fact amply demonstrated in the huge outflows from mutual funds


By the way, the above stats imply that high frequency trading and ETFs combined account for about 60 percent of the volume, about in-line with prior published estimates.

Finally, volume is only slightly better for options. The explosive growth we saw in options trading a few years ago has come to a halt. Option volumes are up a modest three percent in Q1 2013, according to O'Shaughnessy.

By CNBC's Bob Pisani

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  Price   Change %Change
NYX
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ICE
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NDAQ
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CBOE
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CME
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RJF
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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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