Quiet in trading room

I'm a professional day-trader with Bright Trading LLC (a US based firm), and a CFA charter-holder.
I've been trading for 4 years and have never experienced a stock market as quiet as this one.
This is my opinion on why the market is so quiet.

Why is it so Quiet in the Trading Room?


NYSE volume increased 17.9% in 2002. Physical stock trades were up a whopping 60.3%, to over 545 million trades, from only 340 million trades the year before. These are the kind of statistics day-traders love to hear. But if there is so much more action, why does it seem so quiet in there??

Perhaps we should decipher through the statistics a little bit further. Yes, volume increased 17.9%, but let’s think about this. If a stock is trading for $50 a share, a person buying $10,000 worth of the stock, buys 200 shares. If the stock falls to $25 a share, that same person can now buy 400 shares. Hence, the volume on the stock should double. So a better statistic to use would be dollar volume. What did dollar volume do in 2002? It declined 1.7%. Hmmm...well that would explain a few things, but that’s not a very big decline. So is it safe to assume that 2002 was similar to 2001. Not so fast.

In 2002, physical stock trades amounted to 545 M, on total volume of 362B shares. This means the average stock trade was 664 shares.
In 2001, physical stock trades amounted to 340 M, on total volume of 307B shares. This means the average stock trade was 906 shares.
In 2000, physical stock trades amounted to 221 M, on total volume of 262B shares. This means the average stock trade was 1186 shares.

These statistics are very alarming. If we have been in a bear market for the past 3 years, and the average price of shares traded has fallen from $42.13 in 2000, to $28.55 in 2002; shouldn’t volume be increasing as a typical investor can afford more shares??
Then why has the average stock trade fallen to only 664 shares? What is happening here?

The fact is, it’s not the individual investor or the trader accounting for the changes in these statistics; it’s the institutions.
The institutional trader; meaning the mutual funds, the pension funds, the insurance companies are the one’s being quiet. They by far, are your major market movers. It’s their huge block trades that move the prices of stocks. And it’s their lack of action, that is keeping this market quiet.

So why is it that the institutions are so quiet? There is a number of reasons.

1) The bear market has taken it’s toll on the assets of these institutions. Wealth has been destroyed, so they simply don’t have the purchasing power that they once did. Many mutual fund investors have been pummelled, and they certainly don’t feel like losing any more of their hard earned dollars. So their contributions have dropped.

2) Institutional traders are getting smarter. Institutions have to cut costs wherever they can, because people won’t pay these 3-4% MER’s for a decline in the value of their fund. So institutional traders are focusing more on the price impact of their orders. In the bull market of the 1990s, a mutual fund didn’t care if it had to pay 3-4% to get into the stock, because the stock was going to be up 40% by the end of the year. Now with stocks declining in value, this 3-4% only hurts the fund further. So they aren’t sending those insane market orders for 100,000 shares. They are breaking their orders up into smaller lots, to get better executions. This explains why you don’t see those huge bids and offers anymore.

3) Institutions are taking their action to many of the regional exchanges and ECNs. Years ago institutions had very few options as to where they would place their trades. Now there is Island, Archipelago, the NASD, and all the other regional exchanges, where an institutional trader can find liquidity. Hence NYSE institutional volume declines.

So what is it going to take to get the institutions back into the game?

I wish there was a clear-cut answer to this question, but that simply isn’t the case.
The NYSE is definitely losing business to the other exchanges, and if they want to get this business back, they are going to have to offer the institutional trader a better market for liquidity; and decimalization was definitely a step in the wrong direction, as we all know the “pennying” games of the specialists.

But still, the main reason for the decline in institutional action, is the bear market. Until stock prices begin to rise again, and people have a reason for increasing their contributions to these funds, the institutions will remain quiet, and alas the trading room will remain quiet too.

There is one other scenario that would bring the institutions back into the game, and give all the day-traders something to get excited about. But that scenario is very ugly. That scenario is another major market collapse. If the stock market decides to go for another free-fall, investors will not stand for it. They have already been pressed to their limits, and will not tolerate another major meltdown in the value of their portfolio. So hence redemptions would start taking hold, and institutions would be forced to sell fast. This would make for a very exciting environment for the day-trader. But if this scenario does develop, the day-trader had better take every advantage of the opportunity, because when the dust settles and we’re sitting at DOW 5000, institutional action will be history.

All my statistics were taken from http://www.nyse.com

 

It might help too if the price of common stock reflected a more realistic relationship to earnings. As such on average, stox are still way over-priced. Earnings expectations drive institutional participation. With guidance in general being suspect, and no real positive near or intermediate improved outlook for earnings growth, it is going to be awhile yet before there are valid reasons to buy.

"If we have been in a bear market for the past 3 years, and the average price of shares traded has fallen from $42.13 in 2000, to $28.55 in 2002; shouldn’t volume be increasing as a typical investor can afford more shares?"

They say the public is always wrong.. but that is true at tops and bottoms. Why would there be more buying by the public in a bear market?

 

"Those were the long lean years, 1911,1912,1913,1914. There was no money to be made, the opportunity simply wasn't there............. "

Jesse Livermore

 

Hey Triple.

What office are you in?

I used to work in the SF office with Dale Pitt and crew. Great guys (Tom, Alan, Greg, and Dale of course).


I never could make money the way Bright guys do, but have you ever considered trading minis ?

I've been supporting myself on futures for 15 years, and have found the following advantages to doing so:

1) cost- I pay 4.80 RT and could even go lower if I would switch firms. This is like .50 cents per share.

2) electronic market - no specialists or market makers fucking you. Trades are instantaneous.

3) massive liquidity. You could move millions without anyone taking notice. This would happen in a millisecond.

4)tax- 60% of profits long term at 20% (all futures are).

5)direction - no such thing as the short sale rule. direction is meaningless. No bullet charge.

6) charts - futures traders are technicians by nature which means things like trendlines are self fulfilling. They work!


Only way I can make money on a consistent basis is trading futures.

Cheers,
Jay

 

good, thought provoklng post


inandlong............you'll get your more realistic p/e ratios if dow hits 5000, although I do'nt know how that's going to help.

 

It also might help if the battle were over teenies, eights and quarters, instead of pennies.

 

Hey Jayford,

I'm in the Detroit office. My office manager trades the minis, and he does ok with it. He says sometimes it gets him into trouble because the minis are TOO liquid (he wiggling in and out).

I will definitely start to look into other ways of trading, if this mkt environment continues. But i have always done good trading NYSE stocks so it's a tough thing to just give up.

I just hope the institutions get active again.

triple

 

That's where I am at too. Of course for everyone, not just traders, it would be nice if the p/e's could come in to line because of a change in the e's.

 

Trust me. WAY easier trading futures.

try it.

Jay

 

This is a great thread. Interesting opinions.