Bloomberg News

Volatility Spurs Volume Boon in U.S. Stocks With Trading Up 11%

February 14, 2014

New York Stock Exchange

Traders work on the floor of the New York Stock Exchange. Photographer: Jin Lee/Bloomberg

One month of equity volatility (VIX) is doing what six quarters of virtually uninterrupted price gains couldn’t: pushing up volume in the American stock market.

U.S. trading averaged 7 billion shares a day in the first 30 days of 2014, an 11 percent gain from a year earlier and the first increase at the start of a year since at least 2009, according to data compiled by Bloomberg. Investors bought and sold after currency turmoil in emerging markets and the Federal Reserve’s decision to curtail stimulus sent the Standard & Poor’s 500 Index down as much as 5.8 percent.

While the pickup came as shares fell, it signals a return to normalcy as individuals come back to the market after five years of paranoia spurred by the 2008 financial crisis and the Fed’s response, said Walter Todd, who oversees about $950 million at Greenwood Capital Associates LLC in Greenwood, South Carolina. The drop in volume beginning in 2009 hurt profit at exchange owners NYSE Euronext and Nasdaq OMX Group Inc.

“The markets, the economy, investors have been in this crisis mode with the Fed for five years,” Todd said yesterday in a phone interview. “You get more people involved, there’s more activity in the market.”

Investors scarred by the 2008 bear market that erased $11 trillion from equities pulled almost $400 billion out of funds that invest in U.S. stocks in the four years through 2012. The trend reversed last year with about $18 billion going into stocks, according to data from the Washington-based Investment Company Institute. Another $4.3 billion has come in this year.

Steady Decline

Volume has decreased since the bull market began in 2009, when almost 9.8 billion shares traded daily. The average fell to 8.5 billion in 2010, 7.8 billion in 2011, 6.4 billion in 2012 and 6.2 billion last year. As the average price of U.S. stocks increased to $77.16 from $24.33 in 2009, the value of daily transactions rose to $279 billion today from $220 billion then, data compiled by Bloomberg show.

Volatility decreased as equities rose, with the Chicago Board Options Exchange Volatility Index averaging 14 last year versus 31 in 2009 and 24 in 2011. Selling last month that erased about $3 trillion from stock values globally sent the VIX’s average level to about 15 since December, the data show.

The VIX closed at 21.44 on Feb. 3, the highest level in more than a year, as the S&P 500 slid 2.3 percent. Volume reached 9.6 billion shares that day after hitting 8.8 billion a week earlier, two of the five highest totals since June, according to data compiled by Bloomberg from both public and private venues.

Calm Consensus

“As we emerged from 2013, market participants were believing that the worst of the ‘crises’ were in the rear-view mirror and perhaps that encouraged more to look to equities,” said Yousef Abbasi, market strategist at JonesTrading Institutional Services LLC, a Westlake, California-based broker. “Whether that’s true or not is yet to be seen, but it certainly was the consensus view.”

Stocks have advanced about 170 percent since March 9, 2009, including an S&P 500 rally in five of the last six quarters. Gains have come as corporate earnings nearly doubled and the Fed, which has kept its record lending rate at near zero percent since December 2008, implemented three rounds of bond buying.

Volume climbed along with volatility during the biggest drop of the bull market in 2011. About 8.14 billion shares changed hands each day from April 29 to Oct. 3 of that year amid concern about Europe’s sovereign debt crisis and the U.S. losing its AAA credit rating following the debt-ceiling debate. Volume averaged 7.8 billion shares a day for all of 2011.

Worst Start

The benchmark gauge dropped 1 percent this year through yesterday, the worst annual start since 2010, data compiled by Bloomberg show. Volume was highest during a 5.8 percent drop from Jan. 15 to Feb. 3, averaging 7.5 billion shares a day. The last time the index fell that much was between May 21 and June 24, when volume averaged 7 billion shares daily, data compiled by Bloomberg show.

The increased trading may aid exchanges. NYSE Euronext, which was bought in November by futures market operator IntercontinentalExchange Group Inc. (ICE:US), posted $263 million in revenue from U.S. equity trading during the second quarter of 2013, down from $475 million in the same period of 2010. Nasdaq says lower volume hurts its business, according to its last annual report.

“Less than 10 percent of our revenue is from stock trading, however we’re well positioned to benefit from volatility in the global derivatives, equities and fixed income markets we serve,” Lee Shavel, chief financial officer of Nasdaq, said in a statement to Bloomberg News.

Bats Merger

Some of the volume is occurring away from public markets. About 37 percent of trading this year has been off-exchange on venues such as dark pools, up from 34 percent in 2009, and 0.5 percentage points more than last year. Bloomberg News parent Bloomberg LP operates one of these alternative venues, called Tradebook.

Bats Global Markets Inc. and Direct Edge Holdings LLC merged earlier this year, creating an exchange operator with about 20 percent of U.S. volume as bourse owners fight for market share.

The high-frequency firms that helped Bats and Direct Edge grow are making less money. Profits in the industry fell to as little as $810 million in 2012 from $4.9 billion in 2009, Rosenblatt Securities Inc. estimates. HFT handled about half of volume in 2012, the most recent data available, compared with 66 percent in 2009, according to Rosenblatt.

Eric Ryan, a spokesman for IntercontinentalExchange’s NYSE division, and Randy Williams of Bats declined to comment.

To contact the reporters on this story: Sam Mamudi in New York at smamudi@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Lynn Thomasson at lthomasson@bloomberg.net


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