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Presented with little comment but we thought, given the exuberance surrounding Facebook, ZNGA's rally, and FFN's double, that we would point out that the four-week average volume on the NYSE has dropped to levels not seen since, yes you guessed it, 1999.
The S&P 500 has had just two 1% days so far this year, and they have both been positive 1% days. The biggest down day for the index is still just -0.57% on January 26th. The huge drop in volatility is surely a welcome relief for most investors. Last October, 15 of the 21 trading days during the month were 1%+ days.
Below is a chart highlighting the 50-day average absolute daily % change for the S&P 500 going back to 2002. Over the last 50 days, the index has averaged a daily change of +/-0.79%. As shown, the reading has dropped by more than half from the high of 1.92% seen just a few months ago.
It's still crazy to look at this chart and see just how volatile things got back in late 2008/early 2009. Last year's volatility, while rough, was nothing compared to what we saw during the financial crisis. At one point in early December 2008, the S&P 500 had averaged a dailychange of +/-4.02% over the prior 50 days, which is the highest level ever seen in the index's history. With the entire US stock market swinging an average of 4% on a daily basis for more than two months, it's no wonder that individual investors are still having a tough time dipping their toes back in the water, even three years later.
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When I was still in the biz, we were beginning to provide a lot of institutional investors with equity-like products that provided equity-like returns with a far lower standard deviation vs the corresponding benchmarks such as the Russell 1000, etc. These products were typically synthetic derivative instruments which were option strategies and swaps that were built to capture at least 80% of the upside of the market while participating very little in the down side. Additionally, many of our clients had no interest in outright equity exposure based on the developing events within the equity markets with a heavy emphasis on the tech blow up and Sept. 11th. The answer to this in addition to the derivative products we provided, was an increasing appetite for short(er) term equity "trades" vs. the traditional buy and hold strategies of the past.
I say this to maybe help with the thought of the equity index futures markets losing the number of participants. I read the report that Nanex posted on here which basically confirmed what I had said before. The bid/ask numbers just aren't what they used to be. They're a bit higher than a few months ago but no where near where they where a few years ago. I also think it's important to remember that institutional traders and hedge funds, etc. do not typically participate in the DOM per say. They typically iceberg into the market or shred into and out of positions via market order algorithms to remain relatively unnoticed which doesn't reflect into the DOM's bid/ask numbers but appears in the overall volume and cumulative delta. An easy example is to watch the DOM and the bid has 50 orders in the queue but you see 350 orders going through.
But the title of the thread is "Are Futures Dying? Volume Drying Up..." And with that being said, we seem to be focusing solely on the equity indexes. Why? I've also noticed many references to the day's range. Let me first say that if you're attempting to trade a market with a low range, your edge is very limited (if you have one). There are so many markets available to trade that provide amazing opportunities day in and day out. As I mentioned before, the energy markets have been phenomenal! The Euro despite what someone else commented on earlier that is doesn't move, has been quite nice lately. There's definitely more than enough volatility in that market to make some nice trades. You really need to be open minded and versatile in trading. If your method requires big swings, you need to go where the vol is and that isn't ES. Not right now anyway. That market has been on a ghost ride since the first of the year with the daily range shrinking. If you're simply looking to gain a few points, the ES can still provide that.
Markets go through cycles and when they're trending, the volume tends to slow down until sellers begin to arrive in force. At that point, there's a disruption in the trend, volume increases as participants decide to get out or change their position to the opposite direction or whatever. The equity indexes are a great example of this.
I honestly think in general, a lot of smart investors are utilizing other markets to obtain equity like returns without the hassle of the HFT trash or the potential draw downs that are becoming more and more frequent. Institutional investors asset allocation models are so far different now than they were 10 - 15 years ago. There's a higher allocation to alternative investments such as hedge funds (multiple disciplines not just equities), FofF's, commodities, private equity, derivative structures linked to benchmark markets, real assets and precious metals, etc. I think the investment landscape is changing and it's important to be aware of this.
Indeed! Bottom line is either you play the cards that are dealt you or you find another game. As PB stated, there is still money to be made trading the ES. If volatility is down, then lever up accordingly. The majority of current changes in the markets may be only cyclical or secular in nature; but to some degree there are going to be some that are structural. .The business has always gone through these changes, but unfortunately these changes are now occurring with greater frequency. Certain aspects of the market will never be the same. Adapt or perish.
Some more statistics from the BIS Quarterly Review.
Both amount of derivatives outstanding and derivatives turnover have increased in 2011. Nothing is drying up. Volatility is lower now than 2 years ago, as the Financial Systems are now feeding a new bubble. Bursting bubbles usually generate higher volatility than growing bubbles.
From what I can see of the ES - things are returning to normal somewhat.
Starting August 2011, we started to see increased volatility.
Now, when we talk about liquidity, there's a few different ways that people interpret the term. For me, liquidity is limit orders, people willing to trade a specific price as opposed to market orders grabbing the best price. When liquidity goes down, volatility goes up, all other things being equal.
Look at the move down (attached pic) in August, we also had a little 'flash crash' that month. Anyone that watches the DOM every day will have noticed how the DOM thinned out in August. The move down and the 'flash crash' no doubt caught a fair amount of liquidity providers way off side. It should be no shock that they eased off a bit.
To me, I was always used to 1.4-> 1.8 million contracts trading on a normal day. Then 3 million became the norm. Combine that volume with the lack of real liquidity providers relatively speaking and we had those 60 point days.
What I am seeing now looks normal to me. It's thickened up considerable on the ES - yesterday was choppy and 5k contracts were going through at levels, both sides without it ticking past.
So - my opinion is, this is not a slowdown. This is not a reduction in people trading. This is reversion back to normality.
This is also a bit of nervousness about a stagnant US economy and a market that is relentlessly grinding up. I mean - who here's going to be buying 1349?
Liquidity providers are here IMO & doing what they do best - taking the spread.
Personally, I'm glad it's going back to normal myself. My hairline went back an inch in the last 8 months...
We are struggling for superlatives (or whatever the antonym for superlatives is). Today's NYSE volume is as low as we could find on Bloomberg data. It is the lowest non-holiday trading day volume in over a decade. This is 26% below last year's post-Superbowl trading day volume. ES, the e-mini S&P 500 future contract, which has tended to be the most liquid and heavily traded instrument reflective of the equity markets, traded around 1.19mm contracts versus a 50-day average of 1.83mm (down 35%) and also we were struggling to find a non-holiday trading day with lower volumes (lower even than on the Thanksgiving Friday of last year's volume). Using our trusty Birinyi ruler and extrapolating the trend since the March 2009 crisis lows, we see No-Volume-Day (NV-Day) as being celebrated on the NYSE in September 2015 (we assume valuations are being adjusted on financials and exchanges as we speak).
The volume in the second half of 2011 was particularly high. The fact that it is coming down just reflects a bullish sentiment that has carefully developed during the last months.
