Despite rising prices, stock trading still depressed

Past rebounds occurred quicker

NEW YORK - Even though US stocks have doubled in price over the past three years, investors and traders large and small are stubbornly avoiding the market.

Trading in the United States has not only failed to recover since the 2008 financial crisis, it has continued to fall each of the past three years and in the first four months of 2012. In April, the average number of total daily trades in US stocks on all venues stood at nearly half of its peak in 2008: 6.5 billion compared with 12.1 billion, according to data from Credit Suisse Trading Strategy.

The decline stands in marked contrast to past economic recoveries, when Americans regained their taste for stock trading within two years of economic shocks in 1987 and 2001. This time around, the stock market has many more players, including high-speed computerized trading firms, which have recently come to account for more than half of all stock market activity. But even they, like all other major groups, have recently been doing less overall trading, according to recent analysis done by the Tabb Group and Credit Suisse.


“When you keep in mind recent history, this is kind of uncharted territory,’’ said Justin Schack, a market specialist at Rosenblatt Securities.

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Investors and financial industry professionals are struggling to understand what the decline could mean, particularly if it continues. Less rapid trading by short-term speculators could be a good thing for buy-and-hold investors tired of being burned by the market. But the decline could also signal a broader turn away from the domestic stock market by investors who want less of their nest eggs in stocks and companies that opt for raising capital in bond markets instead of issuing shares.

“My expectation was that we would see people go back to the stock market,’’ said Charles Rotblut, a vice president of the American Association of Individual Investors. “It remains to be seen whether there will be a core group of people that is just turned off of the stock markets altogether.’’

The New York-based ecosystem of stock trading has been showing the strain of the slowdown. The New York Stock Exchange said last Monday that its first-quarter profit dropped 26 percent, due in part to the slump in stock trading. A few days earlier, Nasdaq announced that its first-quarter revenue from trading was down 11 percent from a year ago. Both exchange companies have aggressively moved to capture other businesses that do not rely on stock trading, but they have also embarked on cost-cutting programs.

“We can’t be certain as to when or whether the volume is going to recover,’’ said Lee Shavel, chief financial officer at Nasdaq OMX. “It puts more pressure on us to make certain that our cost base is aligned with this current environment.’’


The recent slowdown has not occurred only on the nation’s 13 official exchanges and trading platforms. Dozens of off-exchange venues, like the so-called dark pools, have captured a larger proportion of all stock trades in recent years, but even their overall trading numbers have been trending down. In dark pools, participants are not publicly identified but the final trades are reported to a consolidated public record.

The decline in trading has not sent the prices of stocks down. Though there is less buying and selling, the people who have remained in the market are willing to pay higher prices, driving the value of the benchmark Standard & Poor’s 500 stock index up 102 percent since the market hit a bottom in spring 2009. But the recent falloff in trading is striking because data from the New York Stock Exchange show that volumes have not declined for three consecutive years since 1960.

For an explanation of the lower trading volumes, many market-watchers have looked to the high-speed traders, who use computer algorithms to take advantage of small discrepancies in share pricing and who have accounted for an increasing share of all trading in recent years. These firms have been curtailed slightly by recent regulations aimed at making the markets less volatile. Also, industry participants say high-speed traders rely on transacting with slower, traditional traders like retail investors and mutual funds. When those groups pull back, the high-speed firms have little choice but to scale back, as well.

“On a typical trade, two high-frequency trading firms will not trade against each other,’’ said Manoj Narang. His New Jersey high-speed trading firm, Tradeworx, is still growing, he said, but for most established firms, if ordinary investors “don’t want to trade, there’s really simply nothing for us to do.’’

Among retail investors, the most reliable source of trading volume has been the day traders who were given access to cheaper trading by discount brokers.