Thread: Is volume still a reliable indicator?

NYSE Trading Falls to 7-Year Low as U.S. Volume Rises (Update1)
By Jeff Kearns and Edgar Ortega
May 23 (Bloomberg) -- Trading on the New York Stock Exchange fell 26 percent this quarter to the lowest since 2001 as alternative venues captured market share and the total volume of U.S. equities climbed.
The shares changing hands each day on the 216-year-old exchange fell to an average 1.27 billion in the second quarter from 1.57 billion a year ago, according to NYSE data compiled by Bloomberg. Total trading rose 19 percent from a year ago to an average of 6.84 billion shares a day, as companies such as Bats Trading Inc. and Direct Edge ECN LLC won more of the business, Bloomberg data show.
``With hedge funds popping up and the ability to do things anonymously and cheaper and quicker, it definitely has an impact on the NYSE,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $6 billion in San Antonio. ``There are different avenues to get things done.''
The NYSE's share of the total value traded slipped to 52 percent in the first three months from more than 70 percent in 1990, according to data from the World Federation of Exchanges. Analysts who depend on volume to help forecast the market's direction are losing one of their tools.
Bats, the third-largest equity market, took business from the NYSE and Nasdaq Stock Market since it started in January 2006. Kansas City, Missouri-based Bats matched about 8.9 percent of total U.S. shares in April, up from 3.5 percent a year earlier.
Trading, Volatility
Direct Edge, which is based in Jersey City, New Jersey, has matched 4.1 percent of the shares traded this month, up from 1.2 percent a year ago, spokesman Rafi Reguer said.
``Technicians should be losing sleep over this,'' said Ralph Acampora, the 40-year Wall Street veteran who helped pioneer technical analysis. ``I can't be as trusting of my indicator, because I don't have all the data.''
Trading in U.S. markets rose with stock volatility as investors took advantage of wider price swings. The NYSE's move to lift restrictions in March 2007 on automation increased volume by making it easier for brokerages that accommodate rapid-fire strategies.
The new venues make it more difficult for technical analysts, who use exchange data to measure demand for stocks. A rally in the Standard & Poor's 500 Index without an increase in volume may fade, analysts say. Last year's rebound in the S&P 500 during September came with the lowest volume in four months. The benchmark peaked in Oct. 10, and fell 11 percent since then.
`More Money'
``More volume means there's more money and support, more demand and momentum,'' said Acampora, the director of technical studies at the New York Institute of Finance. ``You need money to push stocks up.''
Analysts can no longer count the NYSE or Nasdaq trades to gauge volume. Trading on the NYSE, a unit of NYSE Euronext, the world's largest owner of stock exchanges, fell to 1.05 billion shares on May 12, the lowest this year. The average over the last 30 days dropped to 1.26 billion shares, the fewest since October 2004. The 30-day average on the Nasdaq, owned by Nasdaq OMX Group Inc., declined to 834 million shares on March 14, the lowest since October 2004.
U.S. stock trading on every exchange rose 24 percent in April from a year earlier to an average 6.8 billion shares a day. The average reached a record 8.92 billion in January.
Bigger Picture
``At one point, you were able to focus on the volume on the NYSE or Nasdaq,'' said Ryan Primmer, the Stamford, Connecticut- based head of U.S. equities trading at UBS AG, the brokerage that handles the most shares in the U.S. ``Now it's only a slice of the picture. You need to look across all venues to understand the whole picture because no exchange is the dominant trader.''
The NYSE has overhauled its technology to execute trades faster, cut transaction costs and introduced new ways for investors to handle block trades as way to lure back business.
``We are doing everything we can think of to try to reverse the trend,'' NYSE Euronext Chief Executive Officer Duncan Niederauer said May 15 at the annual shareholder meeting. ``The bottom line is that it's very easy to get started and compete with us. The barriers to entry for someone to get a license and compete with us are lower than they have ever been.''
The S&P 500 rallied 9.5 percent since March 10, boosted by the Federal Reserve's support for the bailout of Bear Stearns Cos. and the steepest interest-rate cuts in two decades. Average NYSE volume during the advance was 1.41 billion shares a day, 9.5 percent below the same period last year. Total volume on all exchanges rose 32 percent to an average of 7.27 billion a day during the period compared with 2007.
Dan Wantrobski, senior technical analyst for Fox-Pitt Kelton Cochran Caronia Waller in New York, says investors have reason to be concerned about the S&P 500's rally from March because total volume slipped since the index was falling in January.
``Volume was expanding on the way down and it's contracting on the way up,'' Wantrobski said.

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