Trading Volumes Sink Even as Stocks Rally

Trading Volumes Sink Even as Stocks Rally

Investors of All Stripes Sit on the Sidelines Even as Stocks Have Leaped; Decline Means Pain in Wall Street Earnings.Article Comments (17) more in Markets Main ».EmailPrintSave This ↓ More.

By JONATHAN CHENG And JENNY STRASBURG

Where have all the traders gone?

The stock market just posted its best September in decades, but hardly anyone seems to be joining the rally. Hedge funds, high-frequency trading firms and individual investors have all cut back on stock trading, leaving third-quarter trading volume 25% below the level in the second quarter.

Trading on the New York Stock Exchange, the Nasdaq Stock Market and the American Stock Exchange is averaging 7.1 billion shares a day for the past three months, far below the 2010 average of 8.8 billion shares a day and back to levels not seen in more than two years.

The low trading volume has raised questions about whether September's rally is signaling a broad return of confidence. It is also casting a pall over the coming earnings season for banks, brokerage firms and exchanges, which make their living from churn in the markets. For those left on the trading floor, it has made for very slow days.

"Is it frustrating? Of course it is," said Kenneth Polcari, managing director at Icap Corporates and a 27-year veteran of the NYSE trading floor. "I wish it was much busier here, too, but it's a matter of where we are economically."

Many investors and traders attribute the anemic trading to lingering worries about the health of the U.S. economy, Europe's sovereign-debt woes and concerns about China's growth. The heavy losses suffered through the financial crisis, the May 6 flash crash and rise of computer-driven trading have only exacerbated investor fears.

The decline in trading could be feeding on itself. Colby Harlow, head of Dallas hedge-fund firm Harlow Capital Management, which has about $125 million in assets, says he trades a lot less than a year ago.

"If the volatility isn't there, I can't get in and get out," Mr. Harlow says. He has moved some money out of his long-short equities portfolio, where he typically holds stocks for about three months, and shifted investments to a buy-and-hold strategy in which he stays in most securities for a year or longer.

At online brokerage TD Ameritrade, the average number of trades fell to about 309,000 a day in August, from 484,000 a day in May. Steve Quirk, senior vice president of the trader group, says that while September numbers aren't yet available, they likely will be even lower.

The lower volumes have been felt across the industry, Mr. Quirk says. Ameritrade says it is making a push into foreign exchange and futures trading.

"We talk to a lot of people," said Mr. Quirk, a former floor trader. "They're all waiting for the dust to clear."

Thanks in large part to the ascent of high-frequency traders, which use computers to make lightening-fast bets on the market, trading volumes are still higher than in the early part of the decade, when trades averaged about 3.9 billion shares a day.

Lately, though, high-frequency traders have also curtailed their activity.

High-frequency trading has fallen to 53% of U.S. stock-trading volume this year, from 61% last year, according to estimates by capital-markets research firm TABB Group.


.Persistent client withdrawals from mutual funds and the pullback of Wall Street trading desks, along with declines in market volatility, have blunted the edge high-frequency traders have had in recent years, says Sandler O'Neill & Partners analyst Richard Repetto.

"They don't have the other traders to ride off of," Mr. Repetto says.

Investors have pulled a net $69.4 billion from domestic equity mutual funds since the end of April, according to the Investment Company Institute, the trade association for fund managers.

Over the same period, nearly $123 billion has gone into bond funds, boosting the average daily volume of trading in U.S. Treasury debt 26% this year from a year ago, according to data from the Securities Industry and Financial Markets Association. At nearly $500 billion a day, Treasury trading volume has more than doubled in the past decade.

For large and small stock investors alike, "the most popular trade is sitting on the sidelines," says Kerim Derhalli, Deutsche Bank AG's global head of equity trading.

Rick Bensignor, chief market strategist at Execution Noble, an international investment-banking group, says his clients are a lot more hesitant to take him up on investment ideas.

"I'll put out a stock recommendation to a client, and in the past, where he might have said, 'Buy me 100,000' now he might say, 'Buy me 80,000 or 75,000,' " said Mr. Bensignor. Those trades may not pick up anytime soon, he said.

"You've essentially lost a generation of retail investors who say, 'I don't understand this game any more,' " he said.

Jeff Rubin of Birinyi Associates, who has tracked volumes during bull markets dating back to 1957, counters that while volumes have fallen, it's "not off the charts as that unusual."

Others see the decline in volume as a reaction to all the negative news of the past few years.

"Emotionally, ordinary investors are beat-up—their 401(k)s are in the tank, their house is underwater, there's mistrust on Wall Street," said Keith Springer, president of Capital Financial Advisory Services. "It's going to be like this until we get a big movement on the stock market. What draws people and gets them involved is the feeling that they're being left behind."

—Mark Gongloff contributed to this article.
Write to Jonathan Cheng at jonathan.cheng@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com