2011: highs & lows, stops & gos, ayes & noes

With venue mergers on and off again and new regulations hotly debated, when all is said and done, what really mattered in 2011 was liquidity ... and the lack of it, save for occasional spikes driven by debt crises.
By None

What a long, strange trip 2011 has been – a roller-coaster ride ending in a steep downward trajectory.

It has certainly been a turbulent year. If 2011 is remembered for anything, it will likely be for falling equity volumes – a trend which will continue in 2012 if gloomy macro-economic forecasts keep gnawing at investor confidence.

According to Thomson Reuters Equity Market Share Reporter, European volumes for November remained largely stagnant at US$774.47 billion after a three-month downward trend which saw volumes fall from a year-high of US$1,148.97 billion in August, to US$773.68 billion in October. And even that August spike – largely a wave of selling prompted by a conflagration of US and euro-zone government debt default fears – turned out to be an anomaly. While Europe’s equity trading volumes in August were almost double the same period last year, this was fuelled by unseasonal volatility which quickly dissipated. The resulting fall came from the highest levels of trading activity since in October 2008, when volumes reached US$1,253.39 billion in the aftermath of Lehman Brothers’ collapse.

The experience in Asia was much the same, with liquidity often even harder to find in certain securities and markets. The Asian volume downturn was more pronounced than in Europe. From a 12-month high of US$2,229.34 billion in March, in part a reaction to Japan’s earthquake and tsunami, by October investors were suddenly staring down the barrel of a 53.4% drop to US$1,190.5 billion.

The August spike in equities volumes was also prevalent in the US, where volumes reached 10,563,962,287 shares, up from 7,210,695,049 year-on-year, according to BATS Global Markets. This rise continued strong in September (8,479,507,959 shares from 7,230,972,772 in 2010) and October (8,636,426,339 shares from 7,837,009,054 the previous year), before even American volumes succumbed to the global trend, slipping from 7,704,971,393 shares in November 2010 to 7,330,472,964 last month. Volume in the US is measured by volume of shares traded, unlike in Europe where volume is calculated on value.

So we’re seeing some pretty hefty swings across the globe. How does 2011 fit in with long-term trends?

It depends how far you go back. To put things in perspective, Europe’s three-year low was the US$550.11 billion, reported in December 2009. With London-based brokers anecdotally reporting lower volumes on some days in November than were seen on the last day of trading before Christmas 2010, the first trading volume figures reported in 2012 may break new, and distinctly worrying, ground.

Certainly, the current economic outlook doesn’t look promising. In his autumn statement last week, UK Chancellor George Osborne downgraded GDP growth forecasts for 2012 to 0.9% from the government’s March forecast of 1.7%. European markets are depressed from continuing sovereign debt fears and uncertainty over the fate of the euro, while the impact of political strife on macroeconomic policy in the US is an on-going impediment to recovery prospects moving into an election year. And whenever America contemplates a new president, it’s usually a bumpy ride on the markets until the final decision is known.

Are there any winners in this current environment?

Low volumes can be a downward spiral, from the institutional investor’s perspective. Fewer market participants can mean higher impact costs, the prospect of which can make the difference between taking a new position and sticking with an existing portfolio, resulting in even lower levels of liquidity.

As volumes fall, traders seek out liquidity wherever they can find it. Alternative venues seem to be doing well out of the whole affair.

US-based market operator BATS Global Markets saw its US equities market share total 11.5% in November, up from 9.9% a year ago. In Europe, where the operator has just finalised its merger with alternate venue Chi-X Europe, BATS Europe’s pre-merger market share may have sunk 5.1% versus 6.6% year-on-year, but a combined BATS/Chi-X figure would be closer to 25%, based on November figures from Thomson Reuters, making it the largest trading venue in the region.

Whether the new year will bring fresh impetus and increased volumes to equity markets is anyone’s guess. In times of uncertainty, it is often hard to gauge investor sentiment and anticipate how retail and institutional market participants will behave to particular stimulus. But for the moment, it seems a cold, dark winter has set in for the foreseeable future.

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