Charts of the day, equity volume edition

By Felix Salmon
November 27, 2012
ZeroHedge published this chart:

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Yesterday, ZeroHedge published this chart:


Which reminded me of this chart, which Cardiff Garcia found in August:


Both of them are telling the same story: that equity volumes, far from showing any kind of post-crisis rebound, are continuing to fall fast.

It turns out that this is not a purely US phenomenon. Indeed, the global picture is pretty much exactly the same as the US picture. Here’s data from the World Federation of Exchanges:


What all of these charts shows is that volumes are were on a secular uptrend until the crisis, they had a crisis-related spike, and then they’ve been on a secular downtrend ever since. The question is why.

The uptrend bit is easy: volumes, at least until 2009, always went up over time, especially when they were helped along by things like decimalization and high-frequency trading. But what explains the downtrend? It’s not the decreasing number of stocks: that might explain a bit of what’s going on in the US, but it wouldn’t explain the rest of the world.

Instead, I think that what we’re seeing is the slow death of the stock-market investor — the kind of person who subscribes to Barron’s, idolizes Warren Buffett, and thinks of stock-market investing as a do-it-yourself enterprise. During the dot-com bubble, lots of people thought they were really smart when it came to stock-market investing, and then after the dot-com bubble burst, the rise of discount brokerages helped encourage new people to step in to the market and try their luck.

Nowadays, however, the message is sinking in: it’s a rigged game, you can’t win, and you’re better off with a passive strategy.

The fact is that volume, in and of itself, is not a particularly useful phenomenon: it’s the shallowest and most useless form of liquidity. If the primary purpose of the stock market is to allocate capital to companies which need it, then you could happily lose 90% of the volume in the market without a noticeable decrease in utility.

I’ve got a post coming up about stock-picking as upper-middle-class hobby, but it does seem to me that it’s a hobby which is declining in popularity. That’s bad news for stock volumes, bad news for stockbrokers, and bad news for much of the financial media. But it’s good news for upper-middle class household finances.


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Your thesis is inconsistent with the data we keep hearing about how 50% to 84% of trading is done by HFT algos (and has been for the last few years). If the stock-market investor hasn’t been a major player in years, how can their “slow death” cause a secular decline of more than a few percent?

Posted by absinthe | Report as abusive

A few other explanations:
1. Deflation of a HFT bubble: Per Absinthe’s point, I think most of the movement in the graphs is HFT-driven. Resources were poured into HFT starting in the late 90s. Competition has slashed margins and started forcing firms to restructure, consolidate or die.

2. Inflation of regulatory costs: Related to the above, there has been a steady increase in regulatory expense, both transactional (SEC, FINRA, and SIPC fees) and fixed
(compliance technology + staff). These are significant, especially when you’re competing for (maybe fractional) pennies.

3. Inflation of stock prices: Higher prices can increase transaction costs (as with SEC fees above) and squeeze out some market participants. There was an entire cottage industry built around trading C before the reverse split.

They’re all related – volume begets volume.

Posted by GoldDaddy | Report as abusive

quality work

Posted by CalConfidence | Report as abusive

Some 5 billion shares daily, at $20/share, would be $100B traded daily, or $25T a year. And Buffett disciples will only trade a fraction of their portfolio value each year. How much wealth do you think us small fry manage, anyways?!? There is NO WAY that individual investors such as you describe make up more than a single-digit percentage of the trading volume.

If you notice the water level dropping in the swimming pool, do you conclude that fewer kids are peeing in it?

Posted by TFF | Report as abusive

I continue to be puzzled by your massive blind spot when it comes to individual investing. The goal isn’t to beat the market returns — the goal is to manage risk and individualize the asset balance.

If the markets are efficient, then any reasonably sized random sample of stocks will offer similar long-term returns. A little effort put towards sector diversification will practically guarantee that.

Yet different stocks occupy different positions along the risk/return spectrum. Buy an index and you get a jumble of everything. Buy specific stocks and you can select your own comfort level of risk/return, your own balance of growth/income.

Moreover, the cost of buying and selling individual stocks is on par with the cost of an index fund, a small fraction of a percent. Trade positions in $15k increments once a year, and you have a cost ratio of 0.1%. And of course there is no need to trade that frequently.

Finally, it is easier to sleep at night if you know what you own than if your money is invested in some nebulous fund. I strongly suspect that those who pick their own stocks did a better job of sticking with the market in 2008-2009 (and profiting from the rebound) than those investing indirectly.

Posted by TFF | Report as abusive

@TFF Feel free to post data supporting your claim, I would be interested to see evidence supporting this very interesting claim of yours. PS, the real cost of trading far exceeds the cost of an index fund.

Posted by CalConfidence | Report as abusive

So basically, you are saying that Wall Street is running out of rubes and suckers.

Well, no resource is infinite.

Posted by Matthew_Saroff | Report as abusive

@CalConfidence, each trade costs $7-$8 these days. If I sell $16k of one stock and buy $16k of a different stock, then I’ve spent $16 on trading. That is a tenth of one percent of the invested capital, and assumes that you trade every position every year (which is obviously excessive).

VFINX has a management fee of 0.14% annually and net expenses of 0.17% annually, at least according to Morningstar. If you have a few hundred thousand to invest, then you can build a sensible portfolio (and trade occasionally) more cheaply than an index fund.

PS: This is grade school math, and I included the assumptions in the earlier post. Do you really need it spelled out for you in that kind of detail?

Posted by TFF | Report as abusive

Just checked — three-year total transaction fees of 0.4% *and* most of that trading pushing around a fraction of the total to see if more active trading can beat buy-and-hold based on a similar philosophy. (It doesn’t seem to make much of a difference.)

That’s cheaper than VFINX.

Posted by TFF | Report as abusive

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