What happened to the volume? I spoke at the Securities Traders Association of New York annual conference today, and one of the main topics at the Q and A was the decline in trading volume.
Traders seemed surprised that while volume was heavy and volatility spiked up as the Libyan and Japanese events unfolded, volume and volatility began dropping immediately as soon as the market stabilized. Volumes in options have also declined. (See CNBC.com Thursday Market Wrap)
Several explanations were put forth for the lower volume, and it is likely that all of them are contributing factors:
1) volume was heavy initially as professional traders (hedge funds) reduced exposures; as the market stabilized, there was less trading activity because traders have indeed been uncertain about the direction of the market.
2) high frequency traders, which make up 60% of the trading volume, are trading less because the Volatility Index (VIX) is at extremely low levels; these traders primarily use statistical arbitrage as a trading strategy and when volatility is low these trades do not work as well.
3) some of the biggest firms on the street (Morgan Stanley, Goldman) have closed or are closing their prop trading desks.
4) Retail traders have been trading less because the macro uncertainty (Mideast, Japan) has made it more difficult to figure out what is going on. Patrick O'Shaughnessy, analyst at Raymond James, noted yesterday that Daily Average Revenue Trades (DARTs), a standard measure of trading activity, declined 5 to 10 percent at the major online brokers from February to March.
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