Volumes are headed lower this year.
According to an analysis by Goldman Sachs, cash equities share volume will drop 16 percent in 2009 from last year. Behind the decline is a reduction in debt at brokerages and hedge funds, and redemptions by fund investors.
Most of the decline will occur during the first half of the year. The situation will stabilize in the second half, Goldman reports. Overall, average daily volume will decline to about 7.5 billion shares this year from 8.9 billion shares last year, Goldman estimated in a report issued last week.
Trading in New York Stock Exchange-listed Tape “A” and Nasdaq-listed Tape “C” securities will suffer the most, with declines of 18 percent and 16 percent, respectively. Trading in Tape “B” securities–mostly ETFs listed on NYSE Arca–will fare better, declining only 8 percent.
In its report, Goldman surveyed all the major asset classes, including cash equities, derivatives and fixed-income securities. “We expect 2009 to represent the first major decline in industry wide volume trends in over a decade,” Goldman analyst Daniel Harris reported. He added that 2008 is likely to represent “the high water mark on volumes for a number of years.”
Deleveraging and investors’ flight to cash are to blame for the expected declines in the trading business, Goldman noted. Both brokerages and hedge funds have sliced their debt-to-equity ratios in the past year in half. Goldman suggests that will lead to less trading. Brokerage debt stands at 18.4 times equity, down from about 28 times equity at the ratio’s peak in late 2007.
Long/short hedge funds are now levered 1-to-1, down from 2-to-1 at their peak. The impact of deleveraging can be seen in the margin debt statistics. Brokers’ margin loan levels have toppled from a high of over $350 billion outstanding in 2007 to about $200 billion today.
Accompanying the drop in debt is a similar decline in equity assets under management at both traditional money managers and hedge funds. Equity assets under management at traditional money managers dropped nearly in half last year to $4 trillion. Assets under management in equity-based hedge funds stood at $587 billion in November 2008, down from $865 billion a year earlier.
Money is moving out of “risk-based assets” such as stocks and bonds and into money market funds and U.S. Treasury securities. “We do not see a near-term end to this trend,” Harris reports.
The expected decline in the trading business is reflected in the stock prices of the two largest exchange operators, NYSE Euronext and Nasdaq OMX. NYSE Euronext’s stock price has fallen more than 70 percent in the past year. Nasdaq’s stock lost half its value during the period. Goldman chopped its price targets for both companies recently but does not rate either a sell. It rates Nasdaq a buy and NYSE Euronext a neutral.
