Volume and a Valentine’s Day Breakup: It’s you, not me?

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This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

Trading volumes have been down a lot over the last few years. Volume started to disappear in early 2009 and good volume days have been a rarity since then. This trend started off as being viewed as though volume was in a slump and would return soon.That has not happened. The markets have been melting up for the last 5 to 6 months and volume is still scarce.

A common phrase market watchers have been hearing since 2008, about all things financial, is that this is “the new normal”. Since the start of 2012, I can’t help but wonder if low trading volume is the new normal too and if traders need to just stop pining for its comeback. So many aspects of the markets have changed in the last few years. Why do we traders keep thinking that volume will come back to us? Maybe we just can’t seem to realize we have been dumped. It is Single Awareness Day next Tuesday and maybe traders should use that yearly chocolate holiday to close the book on our relationship with volume. It was good while it lasted. Volume made each day better. The sun shined a little brighter when you could get into a trade where you wanted and then be able to exit within a regular market swing.

Trading in a high volume environment has less risk. Traders can plan out a trade by looking at the trading book and volume charts. The entry and exit points can be chosen from the best possible options when there is good volume. When there is bad volume, entry and exit options are limited and an active trader’s volume per trade will also belimited.

The Financial Times has reported the January 2012 volume traded stats in the US and the numbers are startlingly low. The daily average volume for January was at levels not seen since 2005 and the three month average is at its lowest since 2007. A curious fact of this low volume is that the volatility last month was also down. The FT reports that, according to Deutsche Bank, price volatility in the S&P 500 index for the past month has fallen to 8.2 per cent, versus a three-month average of 21.8 per cent.

When volumes are down, volatility is usually up. This could just be a phase or it could be part of the new normal traders need to wake up to. Volume was the best partner a trader could ask for, but it appears to have moved on.

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

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Showing 4 comments
  • Value Indexer

    That’s interesting to know. If there’s a major drop in volume it would make sense to look at the two major sources of volume. I don’t know the market but it sounds like #1 is computers and #2 is traders like you. We know #1 has grown a lot in the last decade. Could that be changing?

  • Tusk Trader

    Computers are a big part of trading, but there are actually two groups of ‘computers’. There is the High Frequency Trading group. Programs who make money mainly from credits. Then there are computers that are actually people, like me. This second group of computer programs are set up to match index moves or to assist with institutional trading (which now happens often through computer programs). Over all ,HFT is on the decline over that last few quarters (statistically) and the other types of computer programs are about flat for growth recently but a growing area overall. There are still actual professional traders typing in orders, but this volume of trading is on the decline and has been as institutions rely more on computer programs run by traders.

    The biggest group that the market is lacking right now for volume is the retail investor. They have not returned since the crash a few years ago. That is the group that I think might never come back. With the rise of ETF’s and index products, there might never be a need for that group to return as they once existed.

    One last group that has declined in trading volume recently are the active institutions. Hedge Funds, Asset managers etc. Many got kicked in the teeth last year and could be quiet on volume for a little while longer. I hope I provided a bit of insight. If you have any other topics you would like me to write about, send it my way and I can use it for a blogpost topic and try to offer my perspective.

    Thanks for the comment.


  • hedge funds

    “New Normal” is a failed prediction about the markets. When Pimco’s executives made the “new normal” prediction S&P 500 index was at 900. Today it is near 1400. They said we should get used to low single digit returns. The market went up more than 50%.  Read our article about this: http://www.insidermonkey.com/blog/2010/11/10/el-arians-predictions-and-the-new-normal-nonsense/

    • Tusk Trader

       @hedge funds 
      The reference to the “new normal” is not a direct reference to the Pimco investing outlook. That term has morphed over the last 3 years to reflect a new trading and new capital market environment that we are in. There is no Pimco reference in my blog and none was intended. I read the article you attached there were a number of people predicting a slowdown pre Lehman. The credit markets froze up in August 2007, over a year before the Lehman meltdown. I have no idea who told you there wasn’t. Your article also comments on the Pimco prediction of a 4-5% return and you mention  looking for an asset class that returned that? Pimco’s overall point has to do with the cost of risk and of heightened risk at higher returns. I am not trying slam your work,  I just don’t understand your point in your article. It makes no sense to me and I am more confused about how it references the new trading environment.