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Stock Trading Is Still Falling After ’08 Crisis

Nathaniel Popper|The New York Times
Monday, 7 May 2012 | 10:57 AM ET

Even though American stocks have doubled in price in the last three years, investors and traders large and small keep giving the market the cold shoulder.

New York Stock Exchange
Photo: Oliver Quillia for CNBC.co
New York Stock Exchange

Trading in the United States stock market has not only failedto recover since the 2008 financial crisis, it has continued to fall. In April, the average daily trades in American stocks on all exchanges stood at nearly half of its peak in 2008: 6.5 billion compared with 12.1 billion, according to Credit Suisse Trading Strategy.

The decline stands in marked contrast to past economic recoveries, when Americans regained their taste for stock trading within two years of economic shocks in 1987 and 2001.

This time around, the stock market has many more players, including high-speed trading firms, which have recently come to account for over half of all stock market activity. But even they, like all other major groups, have recently been doing less overall trading.

“When you keep in mind recent history, this is kind of uncharted territory,” said Justin Schack, an analyst at Rosenblatt Securities.

Many market experts say the biggest reason for the shrinking volume is that traders and investors remain leery that the economy will suddenly turn on them in the wake of the financial crisis, the wild swings in stock prices and the European debt troubles.

Investors and financial industry professionals are struggling to understand what the decline could mean, particularly if it continues. Less rapid trading by short-term speculators could be a good thing for buy-and-hold investors tired of being burned by the market.

But the decline could also signal a broader turn away from the domestic stock market by investors who want to hold less of their nest eggs in stocks and by companies that opt for raising capital in bond markets instead of issuing shares.

“My expectation was that we would see people go back to the stock market,” said Charles Rotblut, a vice president of the American Association of Individual Investors. “It remains to be seen whether there will be a core group of people that is just turned off of the stock markets altogether.”

The New York-based system of stock trading has been showing the strain of the slowdon.

The New York Stock Exchange said last week that trading in the first quarter fell 23 percent from a year earlier. A few days earlier, Nasdaq announced that its first-quarter revenues from stock trading in the United States were down 7 percent from a year ago. Both exchange companies have aggressively moved to capture other businesses that do not rely on stock trading, but they have also embarked on cost-cutting programs.

“We can’t be certain as to when or whether the volume is going to recover,” said Lee Shavel, chief financial officer at the Nasdaq OMX Group.

The recent slowdown has occurred not only on the nation’s 13 official exchanges and trading platforms. Dozens of off-exchange operations have captured a larger proportion of all stock trades in recent years, but even their overall trading numbers have been trending down.

The decline in trading has not sent the prices of stocks down. Though there is less buying and selling, the people who have remained in the market are willing to pay higher prices, driving the value of the benchmark Standard & Poor’s 500-stock index up 102 percent since the market hit a bottom in the spring of 2009.

But the recent falloff in trading is striking because data from the New York Stock Exchange shows that volumes have not declined for three consecutive years in records going back to 1960.

For an explanation of the lower trading volumes, many market-watchers have looked to the high-speed traders, who use computers algorithms to take advantage of small price discrepancies and who have accounted for an increasing share of all trading in recent years.

These firms have been curtailed slightly by recent regulations aimed at making the markets less volatile. But more fundamentally, industry participants say high-speed traders rely on transacting with slower, traditional traders like retail investors and mutual funds. When those groups pull back, the high-speed firms have little choice but to scale back as well.

“On a typical trade, two high-frequency trading firms will not trade against each other,” said Manoj Narang. His New Jersey high-speed trading firm, Tradeworx, is still growing, he said, but for most established firms, if ordinary investors “don’t want to trade, there’s really simply nothing for us to do.”

Among retail investors, the most reliable source of trading volume has been the day traders who were given access to cheaper trading by discount brokers like E*Trade and TD Ameritrade.

Steve Quirk, a senior vice president at TD Ameritrade, said these investors were still scarred by the financial crisis in 2008-9, which followed the bursting of the Internet bubble in 2001. More recently, share prices have steadily risen but with jarring short-term reversals.

Stock trading now accounts for 16 percent fewer customer trades at TD Ameritrade than it did in 2009. “We’ve had instances where it looked like things were clearing up,” said Mr. Quirk.

The company’s clients in some recent months tiptoed back into stocks, he said, “but then they rather surprisingly just quit.”

Among the broader population, the most common investment in stocks has been through mutual funds. The most conspicuous sign that these investors have grown disenchanted with American stocks has been the flow of money out of domestic stock mutual funds, which were drained of more than $400 billion since the start of 2008, compared with an inflow of $52 billion in the four years before that, according to the Investment Company Institute. The outflow has continued into 2012.

The shift is partly attributable to the growing number of seniors moving from stocks to bonds, which is typical in retirement. But surveys by the institute have shown that investors young and old have grown less willing to invest in domestic stocks, even with interest rates on bonds at record lows in recent years.

Some of this money has flowed into increasingly popular exchange-traded funds, which are baskets of assets that trade like stocks. But even more has flowed into bonds. Some financial advisers worry that Americans preparing for retirement are giving up the investment gains that are possible in stocks and ignoring the possible future risks in bonds.

“We worry that our investors are trading one form of risk for another,” said Francis M. Kinniry Jr., a senior investment strategist at Vanguard.

The departure of long-term investors does not always lead to lower trading volumes. When people are pulling money out it can lead to spikes in trading, as it did in August when the European debt crisis heated up. But when long-term players exit the market it can lead to a reduction in trading over time, which has many market participants watching the behavior of ordinary Americans like Fred Lines, a retired electrical contractor who lives on Long Island.

Mr. Lines, who is 75, said he used to trade stocks regularly, and had most of his money in stocks even after retiring and many of his peers pulled back. He started to retreat after the demise of the investment bank Bear Stearns in 2008 and has continued to retreat, most recently in December when he shifted funds from preferred stocks in blue-chip companies to corporate bonds. The recent positive returns have not dispelled his fears that the market will suddenly turn on him.

“If it goes up, I know it’s going to go down again,” Mr. Lines said. “I used to just buy the stock and hold it — after a few years it was always up. Now you can’t trust that.”

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