According to "Traders Exit High-Speed Lane" by Tom Lauricella (Wall Street Journal, May 5, 2011), equity trading has slowed down since last year's market "flash crash." Citing concerns on the part of previously active algorithmic traders and longer-term investors with a stomach for more calm, trading volume has dipped as a result. In turn, volatility has quieted, rendering it difficult for high frequency traders to turn a profit. Lauricella adds that some hedge funds that engage in statistical arbitrage have shut down or entered into fewer transactions if their performance has discouraged investors from sending more money their way. A counter opinion described in the article is that trading volume was artificially high during the credit crisis and that current numbers reflect the norm.
Institutional investors are impacted by the depth and breadth of trading activity in any secondary market in part because risk-takers facilitate liquidity by being the "other side." Having worked on several trading desks and also done research in the area of market microstructure, I know firsthand how aggregate levels themselves can fall short as a guide to what is really going on beneath the surface. Those pension funds and endowments that track short-term dynamics for timing purposes (i.e. market entry or exit) may want to examine the bid-ask spread trends along with price behavior relative to technical indicators in addition to total volume and volatility. For those that have relationships with high frequency trading ("HFT") teams, note that the Financial Industry Regulatory Authority ("FINRA") has publicly declared its intention to scrutinize firms that effect "orders by use of HFT models or trading algorithms" by making sure that "such trading complies with applicable FINRA rules and federal securities laws and regulations, including anti-manipulation provisions." Some assert that high frequency trading litigation may accompany heightened enforcement activity.
Note to Readers: The items listed below may be of interest.
- "Findings Regarding The Market Events of May 6, 2010: Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues," September 30, 2010
- VIX® - CBOE Volatility Index Frequently Asked Questions
- February 8, 2011 Letter to Compliance Professionals From Susan F. Axelrod (FINRA Executive Vice President - Member Regulation) and J. Bradley Bennett (FINRA Executive Vice President - Enforcement)
- "Man Vs. Machine: Pros and Cons of High-Speed Trading" by Bob Pisani, CNBC, September 13, 2010