Why is volume so low? This has been the primary complaint from trading desks for two weeks now. Never mind that we are melting up to new highs, traders who make their living trading are grousing because business is poor.
It's pretty simple: the low volatility creates low trading volumes. I am not just referring to volatility as in the CBOE Volatility Index (VIX). I am simply referring to point swings between the daily highs and lows on major indices: they have been lower than usual.
Why has this led to lower volume? Because momentum traders see less opportunity for profits when volatility is low.
In particular, high frequency traders — which make up about 60 to 70 percent of the consolidated volume at the NYSE — make their money by arbitraging, by exploiting minute differences between say, a cash security and its equivalent futures contract.
In periods of low volatility, the ability to make small profits on these arbitrages drop, so trade volume drops in response.
One expert in high-frequency trading put it best to me: "When there's no volatility, High Frequency's computers are bored."
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