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By Ilene at Phil’s Stock World with guest author Chopshop:

This article is a follow up to The Missing Volume, my previous article on the diminishing volume in the U.S. equity market. (So the first part of this article may be familiar because I’ve included the interview with Nicolas Santiago to provide context.); Previously, Nick at InTheMoneyStocks.Com shared his thoughts on market volume with me. After interviewing Nick, I contacted Chopshop at Fibozachi to further investigate the disappearance of market volume. This article reviews Nick’s thoughts and adds Chopshop’s observations.

Nicolas Santiago asked “Where has all the volume gone?”

Excerpt from ”The Missing Volume,”

Are retail investors and non-professional stock market traders still actively involved with investing and trading their accounts?  Phil sent me an article on the subject, “Where Has All the Volume Gone?” by Nicolas Santiago at his Rant and Rave blog, and I called Nicolas up to talk with him about it…

Nick writes in Where Has All the Volume Gone?:

“Let’s say the market is in an economic recovery and the financial crisis is behind us. Normally one would expect the trading volume in the stock market to increase. This has not been the case. Volume for the month of November and December 2009 have been lighter than August of 2009. Remember August is notoriously the lightest trading month of the year. Hence the term ’summer doldrums.’ January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009.

Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’. This is as dull of a market as we have seen in many years. While there are some stocks such as Apple (NYSE:AAPL), and Amazon (NASDAQ:AMZN) that have traded with respectable volume the bulk has come from government owned names. Stocks such as Citigroup (NYSE:C), American International Group (NYSE:AIG), Fannie Mae (NYSE:FNM), and Freddie Mac (NYSE:FRE), have often accounted for one third, and sometimes half of the daily volume on numerous trading days.”

Ilene: Nick, why do you think volume is so low?

Nick: The public is out of the market, for the most part… In a healthy market, as it’s going up, you get heavy volume. We’ve now gone straight up, on low volume, without any meaningful corrections. These are not normal movements for a bull market. It’s not healthy to move up on low volume – this is the opposite of what you would see in a true bull market.

But on down days, we do get heavy volume. The market is trading as though someone is propping it up, someone doesn’t want it drop…

There’s also huge volume in several largely government-owned stocks, such C, FNM, FRE, and AIG. These are only four stocks in a market which has thousands, yet you can see a small group of stocks accounting for sometimes half of the daily volume.

Who would buy these stocks to own, who would buy Citi? It’s government run, with a $75B market cap – humongous, and it’s probably not even worth zero.

Ilene: How do you know there are one or a few institutions in the market trying to keep it up?

Nick: We don’t know for a fact. However, when markets trade higher on light volume it is usually just a few institutions involved. Heavy volume means many institutions are involved.

Ilene: How do you know when the market’s going to be “propped up”?

Nick: Chart patterns. I can see when the buy programs kick in and can almost predict it by watching the charts. You can catch the market tipping its hand, and that’s in the chart patterns you get familiar with. You can see the buy programs better in GS and in AAPL than in smaller cap stocks.

Ilene: Is the government involved in manipulating the market?

Nick: I don’t know. There are definitely large forces in the market. The government certainly interferes and has an effect.

Ilene: What do you think the market will do through the rest of the year?

Nick: This market reminds me of the top in 2007. In 2007 the market had three panics – all with very heavy volume sell-offs. But volume on bounces leading up to the October top was light. When markets trade higher on light volume it’s very concerning.

This year, 2010, is not going to be like 2009. I think this will be a negative year, maybe 15-20% down. I don’t think there’s any economic recovery. It’s a traders market for the next 10 years. The consumer won’t be spending. The system doesn’t work. They’re inflating the market to make it look good. The plan is to inflate the market up to apparent health, but it’s going there on the back of the dollar going lower.

I don’t see the S&P going past 1178. At least one more bounce back higher, probably in early to mid February. These bounces should give good shorting opportunities.

What makes capitalism work is fail, and they don’t let anyone fail now.


Here’s Nick’s chart of the volume on SPY. Notice the decline in volume over the last year:

Volume moved to derivatives and foreign markets.

Chopshop at Fibozachi watches the markets nearly 24 hours a day and rarely sleeps, so as expected, he had several thoughts on the matter.  After a multi-piece discussion, Chopshop wrote back the following summary.

Chopshop: Volume isn’t in ‘America’ anymore, and it’s not in the ‘stock market’. Investment Banks (IB), broker-dealers (B/D), qualified institutions such as the mythical ‘hedge fund,’ trade futures and options, not stocks.  They may ‘invest’ in equities of all stripes but they aren’t trading nearly as much gurgle (GOOG) ‘n goldilocks (GS) as they did previously, in ’09, ’08 or ’07, whether measured by simple volume tallies or aggregate notional value (volume x share price, indexed to tracking currency).

Even mutual funds (mufu) and pension funds are moving toward allowing portfolio managers bi-directional integrity (the ability to ‘short’ ~ see ‘130 / 30’ funds) … How long before mufu constitutions regularly write 5% derivative allowances (futures & options) into their charters? And when institutions hold equity positions, they’re employing options (and futures) on the underlying to hedge their stakes. They might even be trading around the core or arbitraging the group / space with anything from a simple barbell pair trade (long X, short Y) to some ridiculously capital intensive spider-web to capture ephemeral implied volatility.

Retail traders buy stocks and hold them, for at least a few days. Many who were trading and many of those who might’ve been trading, see the system as a rigged one.  In many ways it is.  Thanks to the illuminating work of folks like Tyler Durden of Zero Hedge, market participants are at least aware of the high-powered algorithmic adversaries that await their orders across the digital seas of the National Best Bid Offer system (NBBO).  (See also Zero Hedge’s articles Zero Hedge reports in Vapor Volume Resulting In Major Swings Indicates Evaporating Market LiquidityLatency Arbitrage: The Real Power Behind Predatory High Frequency Trading, and Ever Wonder Who Controls The Endless Gunning In Afterhours Trading? Here Is One Suggestion.)

So, where has the volume gone?

Well, it’s still in ‘the market’, just not in markets that most Americans follow.  Volume continues to migrate from US exchanges and common equities (stocks) to global bourses and basic derivatives such as equity options and futures.  For a daily reminder of this trend, check out the news flow over at Mondovisione; you’ll see record volumes across global exchanges of all stripes.  Record notional values on RTS (Russian) oil futures, expanded hours in Hong Kong, triple digit y/o/y growth for Dubai gold futures, shrinking lunch hours in Tokyo.

Meanwhile, NYSE Euronext and NASDAQ OMX have gobbled up most regional equity / option exchanges on both sides of the Atlantic while Chi-X and BATS continue to siphon off sizable market share.  On February 11th GETCO was named a DMM (designated market maker) by the NYSE, and on the 12th, the Merc (Chicago Mercantile Exchange (CME)) broadly expanded its strategic partnership with Brazil’s Bovespa ~ Chicago & São Paulo Marry Futures.

It’s not that supra-national exchanges have forsaken America or equities, rather they are practicing Wayne Gretzky’s approach to offense and skating towards where the puck is going to be.

So, I’ll ask you, rather tongue-in-cheek: where is volume going to be?


NEW YORK, Feb 08, 2010 (BUSINESS WIRE) — NYSE Euronext (NYX) announced trading volumes for its global derivatives and cash equities exchanges for January 2010. Derivatives trading volumes in January 2010 were stronger, with European derivatives volumes increasing 32.4% and U.S. options trading volumes increasing 102.4% versus prior year. Cash equities trading volumes were mixed in January 2010, with European cash transactions increasing 4.1% and U.S. cash equities trading volumes declining 23.7% from prior year levels, respectively. Both European and U.S. cash trading volumes, however, increased from fourth quarter 2009 levels.

Animal spirits moved elsewhere but did not die.

Chopshop believes that trading volume has moved from U.S. Equity markets to derivative markets and foreign markets.  Trading patterns, such as low volume market rises and high volume declines, and the use (misuse) of after-hours trading to generate most of the past year’s gains, show that previously normal market forces have changed. These patterns also support the notion that the public in less involved in market action.

Nevertheless, the U.S. Equity market has experienced a dramatic run from the March 2009 lows into 2010.  Chopshop cautions, “whether you are a full-time trader or casual investor, you’re primary concern remains singular: risk management.  Market opinions / biases aside, where financial markets stand today, it is extremely difficult to argue against exercising extreme prudence.  ‘Rationalizations’ of market behaviour (whether brilliant or brain-dead) have nothing to do with effective risk management or tactical allocation.  Bottom line: if you must continue to play in this pool then ask yourself one simple question ~  ‘am I prepared for the possibility of a thunderous typhoon back to lucifer’s lounge round 666 on the INX (S&P 500)?’”

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