Two thirds of respondents to theTRADEnews.com January poll believe global equity market volumes will grow this year, although opinion is divided on whether this growth will be faster or slower than 2013.
Asked how they expected equity volumes to change this year on the back of generally upbeat performance across the US, Europe and Asia last year, 40.98% of respondents said volumes would grow quicker than 2013, while 22.95% said growth would continue at a slower pace than last year. This forms a combined total of 63.93% of responses expecting on-going volume increases.
Over a quarter of respondents – 26.23% – said global equity market volumes would stay the same, while a minority of 9.84% said volumes would decline.
Rose-tinted outlook
Matt Samelson, principal at capital markets consultancy Woodbine Associates, said the optimism shown in the results may be overly optimistic.
“I’m surprised at the high portion of responses predicting an increasing to the pace of growth in trading volumes and I predict we will see the same or slightly faster growth to that experienced in 2013,” he said.
“Economic factors and government stimulus issues will be key volume drivers and if the economy changes substantially or there is pertinent change in government stimulus, investment managers are likely to make material changes in holdings which will drive transaction volume,” he said.
“While I expect there will be some growth, I don’t see marked change that woul driving substantial increases in equity volumes,” Samelson said.
He added that no major market structure issues would likely have an impact on trading volumes in the US specifically as there are limited developments expected within the next 12 months.
Stability pays
Vlad Khandros, director of market structure for UBS, said the US Federal Reserve’s decision making on tapering would be the biggest factor for equity market volumes in 2014, although changes to volatility could also have an impact.
“We’re hopeful equity inflows continue and we have seen this in the fund flows and among clients,” he told theTRADEnews.com. “This will help equity market volumes in addition to the overall performance of the equity market.”
The impact of institutional money shifting into equities would spur greater retail activity in equities, he said, adding that the absence of disruptive market events like the 2010 flash crash would also maintain volume growth.
“The fact we haven’t had any major market structure issues recently has also helped preserve confidence in the equities market,” he said.
The implementation of limit up-limit down and circuit breakers in the US market had further boosted confidence for investors in equities, although any major trading error would give a short-term bump in trading volumes linked to higher volatility, Khandros said.
HFT effect
However, according to Jeffrey Wallis, partner with SunGard Consulting Services, such market disruptions would spark a significant drop in equity trading volume despite the volatility spike, as high-frequency trading (HFT) firms exit the market.
“HFT strategies are based on market arbitrage and when the underlying exchange technology doesn’t work correctly, it will affect the HFT players the most,” he said. “They’re finding it tough in this market to protect against the downside of operational risk created by large-scale disruptions and I expect we’ll see a more graduated growth in equity volumes linked to a reduction in HFT activity in 2014.”
Compounding the effect of less HFT liquidity in the market, Wallis said overall equity volumes – particularly in the US – would show the effects of the stunted rate of IPOs in the market.
“These results are very optimistic and I don’t think they properly reflect the state of the capital formation process, which is lagging behind in its efforts to bring companies to market through initial public offerings,” he said.