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Pisani: Stocks Rise But Trading Is Dead (Update)

UPDATE: The tortoise ate my rally. What happened? You can blame today’s intraday decline on the uncertainty surrounding the Korean naval vessel incident, but that is nothing but an excuse for the wobbly action yesterday.

Yesterday was an "outside reversal" day, when the S&P 500 closed below its low for the prior day. Doesn't sound like much, but that has not happened much recently, and it is considered a negative technical indicator.

That, combined with the overbought market, has day traders on their toes; they are clearly a little nervous going into the weekend and are quicker to pull the trigger.

Also bear in mind that there are: 1) very few shorts out there, and 2) lots of cross-current surrounding the end of the quarter.

Still, don't make too much of this...yet. The volumes are so light, the markets are so thin, that even modest buy or sell orders moves things.

At 2:30 PM, there is still only 2.7 billion shares changing hands on the consolidated NYSE tape.

I will be speaking with two options traders about this at 3:20pm ET today.

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Forget Greece or Treasury rates — the biggest frustration for traders remains the lack of volatility, which has led to woefully low volumes for the past month.

Don’t let yesterday’s little blip up fool you, the action has been lousy recently.

Why does this matter? I have called this The Unloved Rally because despite a 10 percent rise in stocks in the past 7 weeks, traders are unhappy because their desks are DEAD.

Equity trading desks are DEAD.

Options desks are DEAD.

No business.

Why no volatility or volume? First, it is low volatility that begets low volume. For example, high-frequency trading — which accounts for 60 to 70 percent of the equity trading volume — depends on volatility to make the trades work. The simplest kind of high frequency trades exploits tiny differences between the S&P 500 cash and futures contract; low volatility makes spreads very tight and thus the computers simply stop churning out trades.

Why is there low volatility?

1) less interest in buying protection. Options markets thrive when traders are worried and buy puts and calls. But think about it: debt markets have made a remarkable recovery. If your high-yield debt went from 40 cents on the dollar to 80 cents on the dollar, wouldn't you be less likely to pay up for protection? Stocks have also done well this year, with the S&P 500 approaching a 5 percent gain. Many traders are still underperforming their benchmarks, hence less urgency to buy protection.

2) Fewer big bets. A lot of traders had already reduced risk last year, so demand for insurance has gone down.

3) The credit default swap (CDS) markets are not as active as in recent years. Some traders are noting that the collapse of parts of the CDS market last year caused less use of options, since market makers who wrote the CDS' used options to hedge their own risks.

4) Many volatility funds have gone under. In recent years, many funds or special trading desks sprang up that specialized in trading volatility. Last year, those that were short volatility got blown up and shut down. Long volatility traders made money, but as volatility has dropped they too are selling volatility.

When will the volatility pick up? There is some signs that open interest in S&P 500 put contracts is increasing, but you have to go out several months — into September and beyond.

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