Equity market transaction volumes really are at an historic high. New research from Tower Group confirms what everybody knows: despite plunging asset values, transaction volumes are soaring, partly because order sizes are falling. In a research ViewPoint published today, entitled Don’t Look Now, But Trading Volumes Are Actually Up: Counting Shares vs. Trades, Tower Group says that aggregate NYSE and Nasdaq share volumes are mostly flat, and remain fairly robust overall as compared to the value of the S&P 500, and that equity trading volumes are at record highs. Trade volume at the NYSE alone has doubled over the last 12 months.
The question is why. “As share volumes largely stabilize and trade volumes climb, a logical result is smaller orders,” says Tower Group, emphasising the importance of distinguishing between numbers of shares traded and numbers of trades when discussing equity trading volumes. The firm says the average trade transaction size (shares per trade) has dropped from approximately 1,400 in 1998 to roughly 600 today. “This shift in order flow toward smaller trades has been driven by several factors, including the impact of decimalization, a greater emphasis on programme trading, the advent and evolution of ECNs, and a trend toward firms breaking up large orders in the hunt for natural liquidity,” explains Tower Group. The last factor is probably the greatest, as orders are broken up in an effort to minimise market impact.
TowerGroup reckons banks and broker-dealers need to adjust their technology and pricing structures to the new environment. “It’s becoming increasingly important to use appropriate measures and terminology when discussing market trends, especially when it comes to a firm’s technology strategy,” says Rob Hegarty, vice president of Securities & Investments, and author of the ViewPoint. “While the stock market may appear to be in a holding pattern, transaction volumes are anything but. Financial institutions need to be ready to respond to new and more significant demands on transaction processing capacity.” Hegarty adds that current market volume trends spell trouble for some firms and opportunity for others. “Brokers charging on a per-share basis are hurting,” he points out. “With average share sizes stagnating and the total number of trades rising, they’re caught in a vicious circle where revenues cannot keep up with processing costs. On the other hand, those charging on a per-transaction basis are reaping more revenues and will be able to strike a better balance.”