Equity trading volume has gone through the roof since mid-September during the recent market downturn. More than 10 billion shares have been trading regularly—and once even more than 19 billion shares—on days of unprecedented activity.
But, what about the future? What does the current crash mean for volume in the coming months and years? That was a subject of discussion on panels and in private conversation among attendees at this year’s Security Traders Association’s annual conference held last week in Boca Raton, Fla.
Case in point: Volumes didn’t recover from the crash of 1987 until 1991. Average daily volume dropped from 352 million shares a day in 1987 to 294 million a day in 1988, before they finally rose to 355 million in 1991 (see table at end of story). And following the decline in 2001, volumes stagnated for the next two years, before bouncing back fully. In 2001, the average daily volume rose from 3.2 billion shares a day to 3.26 billion in 2002. It then dropped to 3.15 billion in 2003, before climbing back to 3.32 billion in 2004.
“I do see volumes as a whole taking a breather next year,” said Alfred Eskandar, global head of corporate strategy for Liquidnet and a panelist at the conference. “You could see a 10 to 25 percent loss of total volume overall.”
Potential reasons for a slowdown in trading include: less hedge fund activity, as funds deleverage or shut down; long-only institutions and retail investors heading to the sidelines after being burned; and the prop desks at former investment banks—which are now bank holding companies—being less active under the auspices of a banking regulator.
Still, not everyone was convinced of a trading slowdown in the coming months. Penson Financial Services is planning on higher volatility and volumes continuing throughout 2009, according to Kevin Vanderheyden, senior vice president of sales and services and a conference attendee.
The counterargument to shrinking volume is that investors in derivatives might seek relative safety in equities. In addition, those institutions and retail investors who have been on the sidelines might return once the volatility subsides, said Gina Fenton, also a conference attendee and managing director of sales at Pipeline Trading Systems, which offers a block trading crossing network.
Also, falling trading costs may draw more investors to equities said Dan Mathisson, head of Advanced Execution Services at Credit Suisse. Thus, the lower trading costs may draw more investors to equities, he said, once stability returns to the market.
Still, concerns remain. As one longtime sellside trader summed it up: “Trading volume went up so much from normal, my fear is that volume could just as easily go down that much from the norm.”
