All that said, I think the most compelling explanation for the decline is that in the last decade, volume activity has been distorted by the move to electronic trading, as well as by the 2008 financial crisis.
The move to electronic trading, which began in earnest around 2003 and rose dramatically through 2008, helped create the HFT industry—and a huge increase in trading volume. Of course, the crisis itself caused a massive spike in volatility and trading volume as well.
Beginning in 2010, however, volumes beat a steady retreat. This makes sense, because as the financial crisis began to abate, volatility declined, which cut trading opportunities. High frequency trading became more widespread, which also reduced trading opportunities. If this is accurate, then the volume run-up from 2003 to 2008 financial crisis is actually the outlier, rather than the low volume we see now.
I'll give you an example: in January 2004, average daily volume at the NYSE was about 2 billion shares (as an aside, during the financial crisis there were days when we were over 2.6 billion shares). It began rising notably in 2005, rising over 3.0 billion in 2007. In October 2008 at the height of the financial crisis, it was over 7.0 billion.
After that water-mark, volume began dropping, with the exception of a few months when the European crisis drove trading spikes. In May 2011, flows were down to 3.8 billion. Yesterday, total volume (all trading in all NYSE listed stocks) was a mere 2.3 billion.
What are the implications? Low volume is partly driven by low volatility, and it makes it difficult for the Volatility Index to rise. When volume is low, you can't string together enough big up days to get a significant correction in the VIX. Sure, you could get a spike to 25 briefly (it's below 12 now), but it would take a lot to keep it there for any period of time.
It would take a prolonged crisis, which the odds are against despite some who think otherwise. I pick 25 because that is a sort of minimum number at which we might generate significantly higher volume for a time.
The bottom line: lower volatility may be a longer term phenomenon, unless we get a serious financial panic all over again.
--By CNBC's Bob Pisani