Volume on the New York Stock Exchange has been increasing too.
Average daily volume over the past three years has been around 1.36 billion shares.
The highest daily volume topped 3 billion shares on January 16, 2009. For the first quarter volume was below average running just above 1 billion shares a day.
For the second quarter-to-date, volumes have jumped to around 1.375 billion shares daily.
The V’s are on the rise.
Do the V’s matter? Do volatility and volume matter? They used to matter.
Lots of data used to matter that have become warped and mangled by “high frequency trading (HFT)”. High Frequency Trading is not new. It used to be known as program trading and has been around for decades. Program trading added to the October 1987, Black Monday crash. But HFT has expanded. There are more practitioners, faster computers, and better algorithms to trigger trades. A statistic we read recently estimated the average holding period for a stock purchased on the NYSE today as 6 months! These HFT programs can execute hundreds of trades per day in staggering amounts with holding periods measured in minutes. The consensus estimates are that HFT comprises almost 60% of average daily volume. This tells us that 60% of a days trading activity is driven by mathematic formulae that are gaming intra-day price fluctuations.
In the old days of our youth in this business, my colleagues like Vince Farrell, David Kotok, Doug Kass, and I would find meaning in increasing or decreasing volume and volatility. Now, I’m not sure what we can discern. The volatility is exacerbated to ridiculous extremes such as we endured in May’s 1000 point ‘flash crash.’
HFT raises serious questions for serious investors: in light of the exaggerated and mangled short-term market metrics, what is the appropriate least-distorted metric against which long-term investors can judge risk, potential, and performance? And, are long-term benchmarks, which endure such volatility, still a valid measure for longer-horizoned, Buffetesque investors? Ultimately, how does one sort through the noise?
Our friend Doug Kass has been writing about the damage wrought by HFT. At the least, it undermines the confidence of fundamental long-term investors trying to do the right, responsible things for their retirements.
All of the short-term noise seems to be getting louder, and investors are yearning for a quiet moment to think and assess. Less sophisticated investors are always the most emotional. They test their “investment theories” daily and take solace or despair from the business section’s recap of yesterday’s movement. The ‘flash crash’ touched off a new, but to-be-expected, round of wailing and woe-is-me teeth gnashing. I’m really not sure how much weight to give to that strange day. Certainly it showed our country’s various trading platforms to be vulnerable.
When buffeted by noise, stick to your knitting. As the noise increases, increase your determination to adhere to your investment discipline and philosophy. Astute readers will glean from this market commentary that increased HFT and short-term orientation in the market actually create more opportunity for those of us who remain long-term investors. As markets moves go to extreme due to obsession with near-term results, opportunities are created for those who do our homework.
There are lots of investment philosophies out there, but most, if applied with dispassionate discipline, will result in success. Our investment discipline is steering us toward multi-national companies with solid balance sheets, strong cash flow, and improving earnings. We are dogged in the tenacious application of our discipline and philosophy. Over time, we expect to continue to be rewarded for our “Farr View.”
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.