Though trading volumes have fallen off in recent years, they remain double what they were five years ago. However, only a fraction of today’s volume comes from "real money," according to a report by Credit Suisse, with the majority of volume coming from high-frequency traders and flow though exchange-traded funds.
According to a Credit Suisse market structure report entitled "Volumes in Crisis?" only about 2.5 billion shares out of an average daily volume of nearly 7 billion are actually from real money chasing actual stocks. That’s down from a high of 5.4 billion shares from real money in 2008.
Volumes have been buoyed in part by institutional investors moving into ETFs. More than half of institutions surveyed by Credit Suisse said they use ETFs more than they did in the past. A small number of institutions, 7 percent, even said they now use ETFs almost exclusively.
Phil Mackintosh, global head of trading strategy at Credit Suisse and one of the authors of the report, said the creations and redemptions of ETFs are significant, but he would classify that kind of activity as mostly market-making.
Institutions will continue to invest in ETFs in the future, he added, noting that many are starting to get comfortable with using index funds to provide beta. "It’s a cheap way to manage exposure," he said.
An even greater percentage of today’s volume comes from high-frequency trading. But Credit Suisse said HFT volume is at risk of being regulated away if exchanges are allowed to charge messaging fees to deter rapid trading. A majority of traders surveyed said that taxes on HFT activity would further hurt liquidity.
While some critics decry the huge profits being made by high-frequency traders, defenders of HFT note that today’s market makers are cheaper than the old specialist system, and point out there will always have to be some cost for ensuring efficient markets.
So far, the exchanges have proposed fees that would likely impact only those HFTs that send the largest number of orders, but Mackintosh urged caution.
"It’s a bit like the butterfly effect," he said. "You change something that seems small, but you just don’t know what effect it’s going to have on the structure of the market further on down the track. I’m a little nervous that what sounds like a good idea might have unforeseen consequences, say to competitive ETF pricing."
The Credit Suisse report also was not optimistic about volumes in the near-term. It predicted that volumes will likely stay low for the next two years, as the markets need resolution of certain global macro risks before they will improve.
