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Honestly, is this an issue that really affects any of us?
The 6E shows 5-600 on either side through most of the day. If that were cut by 60% to maybe 200ish per-side, would that hamper anyone's trading style?
If the volatility were to increase, that would be a good thing for traders. Right? You can't make money if the price doesn't change.
I'm not trying to be insulting here, I'm just trying clarify if any of this matters in any meaningful way.
I bet that if volume were cut by 50-60%, it would still be much more than what you read about in Market Wizards and other war stories up through the 70's and 80's - yet that didn't stop anyone from making money.
Some of the most famous traders, like Michael M. (Marcus, maybe? I forget exactly) made a huge portion of their living in Cocoa - a market that has never been exactly known for blowing the doors off volume-wise. Even back in the 70's, Cocoa was probably some small fraction of the bigger markets that were available at that time.
As far as I'm concerned, it's been established factually that futures, on average, are probably the most liquid that they've ever been in history. But even if they weren't would it matter?
What am I missing?
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So far as currency futures go - since they track the Interbank market prices, in theory, volume could dry up 90% or more, and it still wouldn't affect the individual retail trader.
Price-discovery is going on in the Interbank market, and arb's are going to pull the two together, so a near-total collapse of volume in Currency Futures probably wouldn't even be noticed by the typical guy (or girl) on the street. The only negative effect would be perhaps an extra tic or two in spread. Which would bring the cost up to the equivalent of trading the wider Forex spreads anyways . .
In other markets, like Corn, Cocoa, Oil, Gold, Silver, etc., there's really no other place to go. The cash/physical markets have been around for centuries - so if there were benefit there, they would have overtaken futures long ago. So where else will the volume go in these markets?
Equities, perhaps, may be a different story - so is that the central question to be concerned about here? Are alternative instruments siphoning off volume from the ES? I know little about this part . . so someone else help us out here . .
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According to this forex industry report, the improvement in FXCM's year-over-year numbers is almost exclusively due to acquisitions.
"FXCM emerged as world’s largest forex broker in Q3 mainly due to acquisitions. Indeed FXCM was one of the most aggressive acquirers in the market, acquiring no less than 3 major businesses during 2011"
Outside of acquisitions, FXCM's volume did not apparently increase much. In fact, US volume was essentially flat over 2011. Several forex brokers exited the US market, seeking less-regulated markets. Overall industry volume did continue to increase, but at a slower pace than it had in previous years.
Here are a few quotes from the report:
- 2012 outlook: "U.S.-based forex accounts are hardly growing and the only way for American brokers to increase their client base is to acquire foreign brokers."
- December review of forex industry in Q3: "Overall American market growth is simply disappointing, as all U.S. retail forex combined have added only 111 accounts in the third quarter of 2011. There are 108,490 active retail forex accounts held with American forex brokers."
Conclusion: FXCM's volume may be going way up, but not because it is siphoning business away from futures.
Here is some more fun stuff that is unrelated to the futures-volume question, but I just couldn't resist posting it here. Keep in mind that this is a pro-industry report that was written by forex people.
"After discovering that Gain Capital was using a Virtual Dealer plugin that had unfair trading settings, the NFA started suspecting (rightfully so) that all other brokers do the same. NFA then launched an investigation involving all U.S. forex brokers in order to find out whether they cheat their clients."
"CFTC sued 14 forex firms at the beginning of the year and then 11 more for failing to comply with its various requirements or for accepting U.S. clients. NFA didn’t stay far behind and enacted additional requirements while suing brokers like FXCM for millions for various breaches of its requirements. NFA also launched an extensive inquiry into all forex brokers, trying to find out whether there are more deficiencies. Results of this inquiry will probably be announced early 2012."
" FXCM and FXDD were slapped by class action suits, but these suits haven’t resulted in anything yet. BNY Mellon and State Street have been battling it out with institutional suitors over allegations of unfair currency pricing. While BNY Mellon settled with some suitors, there are still quite a few others out there claiming they were charged not actual deal rates, but the day’s highest and lowest."
"With the U.S. and Western Europe being severely overregulated, Japan has become the most interesting hub for foreign brokers and software providers."
If you can't install dealer plug-ins that manipulate the data in your favor, and you can't charge your customer the "highest print of the day" versus what you quoted them, then the market is "severely overregulated?" :wtf:
Edit: Well, pardon me for using outdated data (Q3).
"Number of forex accounts held with US forex brokers drops by more than 11,000 to all time low of 97,206:"
"US retail forex industry is now showing obvious signs of slow down with number of non-discretionary retail forex accounts held with US based reporting brokers down to record 97,206. This is the lowest count reported since Q3 2010 when first such report was released."
th NYSE and ES (e-mini S&P futures) volumes were the lowest of the year so far. This is the lowest non-holiday trading day on the NYSEVOL (from Bloomberg) since its data began a decade ago and eyeballing ES volumes, this appears to be one of the lowest ever volumes of the last few years. For those who think this is irrelevant as the market's price has risen and so total USD volume remains approximately equal - wrong! Today is the lowest USD volume day since the mid 2009 (which tended to coincide with holiday trading volumes around July 4th) - making today's USD trading volume less than 50% of their 2004-2007 average!
A proxy for total USD trading volume - NYSE Volume multiplied by the S&P 500 is at decade low levels for a non-holiday period...
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and NYSE Volume standalone...
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Fear Factor: Volume Outlook Bleak as Investors Shun Stocks
On Wall Street, risk is suddenly a four-letter word. Retail investors can't stomach it. Pension plan sponsors are allocating away from it.
That's bad news for stocks. Volume has been dropping almost nonstop for three years and shows no signs of improvement. The situation is worse than it was following the crash of 2000. It's worse than it was after the crash of 1987. Fearful of the future and still wincing from 2008, investors are moving funds into bonds, commodities, cash, private equity, hedge funds and even foreign securities-anything but U.S. stocks.
"Our bread and butter is the retail investor," Scott Wren, a senior equity strategist at Wells Fargo Advisors, one of the country's four largest retail brokerages, told Bloomberg Radio recently. "They're not jumping into the market. They're not chasing it. Those who have been around for a little bit have been probably burned twice here in the last 10 years or so. They're definitely gun-shy. They're not believers. I'm not sure what it's going to take to get them back in the market."
Their financial advisers aren't sanguine about the U.S. stock market, either. Only 44 percent of them plan to increase their clients' allocations to U.S. stocks this year, according to a recent survey by Investment News. That's down from 63 percent at the start of last year.
Retail investors own about half of all stocks, either directly or indirectly. Institutional investors, both foreign and domestic, own the other half. Both groups operate under different constraints, but both groups are searching for the same thing: a return on their investment.
For most of this century, stocks haven't provided one. The S&P 500 Index registered a 10 percent loss (including dividends) in the first decade of the 21st century, the worst 10-year period ever. Add to that one recession and two financial crises-one in the U.S. and one in Europe-and the idea of risking one's assets in the stock market loses its appeal.
Pension plans, which own about 20 percent of all U.S. equities, are following individual investors out the door. As a result of the stock market meltdown, both public and private defined benefit plans are underfunded, as their assets have fallen below their liabilities. And because they must earn a return regardless of stock market conditions in order to pay retiree benefits, they are as worried as retail investors.
Ford Motor Co., for instance, which manages about $60 billion in defined benefit plan assets, now allocates 22 percent to U.S. equities and 20 percent to foreign stocks. It plans to drive the combined figure down to 30 percent "over the next several years," according to its recent 10-K filing.
The big carmaker, whose pension plan is underfunded by $15 billion, plans to allocate more funds to fixed income securities and alternative investments, such as hedge funds and private equity. The goal is to "minimize the volatility of the value of our U.S. pension assets," Ford said in its filing.
Ford also plans to close its plan to new employees. The upshot of the changes, Ford contends, will be to decrease its risk. "This will reduce our balance sheet and cash flow volatility and, in turn, improve the risk profile of the company," chief financial officer Lewis Booth told analysts on the company's recent earnings call.
According to data published by the Federal Reserve, private defined benefit plans have been dumping stocks for the last five years-even before the crash.
New rules from the federal government and the Financial Accounting Standards Board are also behind the slashing of stock allocations. The rule changes speed up loss recognition by the sponsors, which reduces reported earnings. That has made the corporate funds less inclined to endure the ups and downs of the stock market.
Public funds don't have the same constraints. Still they have been net sellers of U.S equities, albeit to a much smaller degree. By and large, public funds have maintained their allocations at post-crash levels, although they are swapping positions in domestic stocks for those in foreign securities.
Federal Reserve data illustrates the diverging path of the two big investor groups. In 2003, stocks made up 60 percent of the total assets of both public and private defined benefit pensions plans. That figure is now 57 percent for public plans and 34 percent for private plans.
Still, like their cousins in the corporate world, public funds are unsettled. According to a study released last year by the National Conference on Public Employee Retirement Systems in Washington, the 215 U.S. public pension funds had only 76 percent of the assets needed to meet their expected obligations.
For the California Public Employees Retirement System, or CalPERS, that figure is 70 percent. The plan sponsor manages $219 billion in assets and is dialing back on its risk by cutting its equities exposure. At the end of last year's third quarter, CalPERS allocated about 46 percent of its assets to U.S. and foreign stocks.
That's actually four percentage points below CalPERS' strategic target. "We're maintaining an equity underweight," the plan sponsor's chief investment officer, Joe Dear, said on CNBC last fall. "The difference is in our absolute return strategies. We take a risk buffer and try to go with returns that aren't going to lose us a lot of money."
Absolute return strategies are typically run by hedge funds, which aren't bound by benchmarks and can short stock to hedge their bets. CalPERS had $5 billion invested in absolute return strategies at the end of the third quarter, according to its Web site, part of a trend under way of pension plans investing in hedge funds.
Dear noted there is less justification for taking equities risk these days. "With low interest rates and a relatively small equity risk premium, you are going to have a hard time getting that 7.75 percent," he said. "So you have to look at alternatives. You have to innovate if you're going to get there." CalPERS's growth target is 7.75 percent, slightly below the standard 8 percent pension plans expect to earn over the long haul.
The decline in stock market volume isn't solely related to the decline in allocations. Turnover is down as well. Turnover is a measure of how long a stock remains in a portfolio. It is calculated by dividing the value of all purchases or sales, whichever is lower, by the fund's net asset value. A ratio of 100 percent, for example, implies the fund replaced all of its holdings during the period in question. See Chart: Bursted Bubbles
Whether it's cause or effect, turnover typically rises and declines along with changes in volume. As did volume, turnover peaked in 2009, and has fallen since. For mutual fund managers, according to data from the ICI, turnover hit 64 percent in 2009; falling back to 53 percent in 2010. For hedge fund managers, turnover hit 180 percent at the end of 2008, according to data from Goldman Sachs. It dropped to 132 percent by the end of 2010.
With both allocations and turnover down, traders have suffered. Volume in stocks and ETFs peaked at an average 12.3 billion shares per day in March 2009. In December of last year, volume was averaging 6.4 billion shares per day, a drop of 47 percent. Retail volume has fallen just as hard. Data from Thomson Transaction Analytics, taken from broker regulatory reports, shows retail volume has been cut in half since peaking in March 2009.
The share volume drought is worse than the periods following the crashes of 1987 and 2000. All three events produced tremendous volume during the crashes themselves and in the months that followed. Following the crash of 1987, volume peaked and then dropped sharply.
It then leveled off for three years before turning up.Following the crash of 2000, volume spiked upwards and then remained roughly at its peak level for four years before turning up. This time is different. Trading in stocks (but not ETFs) has declined steadily for nearly three years, with the exceptions of a couple of European debt crisis-related spikes.
Exchange-traded funds haven't fared as badly as stocks. ETF volume also peaked in March 2009 before crashing back down. But, in contrast to stocks, ETF volume has remained flat, with about 1.5 billion shares per day traded ever since. Volume in the SPDR S&P 500 ETF actually rose last year.
Assets managed by ETFs and traditional index funds are on the rise, while assets of actively managed mutual funds are not. The result is that the proportion of stock investments in index funds has hit an all-time high.
At the end of last year, index funds held 28 percent of all stock mutual fund investments, according to the ICI, up from 19.5 percent at the end of 2007. Some investors consider index funds to be less risky than actively managed funds as they eliminate the risk that the manager will not beat his benchmark.
Some stocks are actually doing well. Volume in American Depository Receipts, for example, has been rising steadily since 2007. According to Citigroup, ADR volume passed half a billion shares per day on average last year. That's up from about 170 million shares per day in 2006. The push into foreign stocks following the crash is borne out by Federal Reserve statistics as well.
Between 2009 and the third quarter of 2011, U.S. investors were net buyers of foreign stocks, including ADRs, by $273 billion. By contrast, U.S. investors were net sellers of domestic stocks during the period by $263 billion. Profits Down
Despite the silver linings, the overall decline in volume has hit the industry hard. Profits are down and layoffs are up. Small institutional firms such as Ticonderoga Securities and WJB have closed their doors. Just about all of the larger firms are pruning their ranks. Still, the market was up 7 percent as Traders Magazine was going to press. Could allocations to equities soon follow?
"I don't think I have a good crystal ball on that one," Richard Weil, chief executive officer of Janus Capital Group, a money manager prominent in U.S. equities, told analysts recently.
"People have been afraid of equity markets and equity allocation. But I think if the equity markets remain strong through the first part of the year, there's a good likelihood that institutions will return some asset allocation back into the equity market as their confidence grows. But I think that those decisions have yet to be made and they're very hard to predict."
I think it's important to distinguish that the ES volume may be lightening up - as a by-product of the entire class of stock-oriented products lightening up, but that is not representative of futures in general. Only a very specific sub-class of them.
A couple of days ago, Energy futures set an all-time volume record high, and today, March 7th, FX futures set an open-interest all-time record high (240.6B - per CME homepage).
This brings up an interesting question - why are equity product volumes apparently declining, while other instruments are apparently booming?
I have some theories . . but that's not my area of expertise.
Trading then declined to about $4.7 billion a day in October and is likely to have fallen considerably in early 2012, the Basel, Switzerland-based bank said in a report. The BIS said it derived its estimates from supplementing the data in its foreign-exchange survey, which is undertaken every three years, with information collected from central banks and electronic- trading platforms.
The surveys found currency trading kept increasing in the first year of the financial crisis, before reaching about $4.5 billion a day in September 2008, shortly before Lehman’s collapse, Morten Bech, a senior economist at the BIS, wrote in the research paper. Average daily trading volume then plunged to $3 trillion in April 2009, he said.
“By mid-2009, global foreign-exchange activity had started to pick up again and it rose to $4 trillion a day in April 2010,” Bech wrote. “Our measure shows the foreign-exchange activity may have reached $5 trillion a day in September 2011, before dropping off considerably by the end of the year.”
Foreign-exchange trading has surged as central banks including the Federal Reserve flooded markets with cash to combat the global financial crisis. Japan intervened to help its exporters after a record earthquake and tsunami a year ago, while the Swiss central bank imposed a cap to stem franc strength in September. Efforts to boost growth by protecting exports started a “currency war,” Brazil Finance Minister Guido Mantega said in September 2010. Increasing Volatility
Implied volatility of three-month options on Group of Seven currencies as tracked by the JPMorgan G7 Volatility Index (JPMVXYG7) climbed to 26.6 percent on Oct. 24, 2008, the highest since Bloomberg began compiling the data in 1992. The gauge reached a 15-month high of 15.8 percent on Sept. 23 before falling to as low as 9.71 on Feb. 24.
A lower figure makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.
The BIS report differs from its flagship currency survey which it conducts every three years, with the next one scheduled for April 2013. In the previous survey published in September 2010, it said the average daily trading volume increased 20 percent from 2007 to $4 trillion. ‘Not True’
The BIS supplemented its survey data with information taken from central-bank sponsored industry groups in the U.K., North America, Canada, Singapore, Japan and Australia. It also took data from electronic-trading systems operated by EBS and Thomson Reuters, Hotspot FX and the Chicago Mercantile Exchange.
“While good and timely data are available on prices of foreign-exchange instruments, the same is not true for trading activity,” Bech wrote. “In this article, I show how it is possible to leverage alternative sources of FX activity to obtain a timelier grasp of turnover developments.”
The BIS also used data from CLS Bank, the New York-based operator of the largest currency-trading settlement system. CLS handled an average of $4.5 trillion per day in 2011, compared with $2 trillion in early 2005, according to the BIS report.
The BIS was formed in 1930 and acts as a central bank for the world’s monetary authorities. It has published a triennial survey since 1989.
This may be a topic for further discussion else where, but imho the question of current and more importantly future trading volume is being and will be dramatically affected by any transaction tax imposed. Sarkozy is bent on implementing one in France and others will then follow suite in Europe. It will only be a matter of time then before the US markets get shackled. It seems to me if or once that happens volume will be dramatically cut as either an intended or unintended consequence. To me volume in itself is cyclical by nature, but throw in higher costs to doing business and you will see the cycle turn down for quite some time. imho....
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