Been reading quite a bit lately about how good old-fashioned equities are finding their way back into investors’ favour. And this time it is more than just the indices that are on the move, volume traded is going up too. In many ways, volume or consideration is a more useful indicator of the general health of the trading industry and the US has reported record influxes into managed market funds and ETFs recently. A similar trend is being widely reported across Europe too.
So, if this is the start of a real resurgence, who will the winners be? They say a rising tide lifts all boats and so I guess we can expect all market participants to prosper to some degree. But is this “the right sort” of liquidity? Are the original participants returning to the market or is it just more HFT chasing its own tail?
The charts below might help answer this. The first looks at total European equities traded by consideration and it certainly seems to show the beginnings of a trend.
The second chart is based on data from the Fidessa network. Because it focuses on its core client base of asset managers and sell-side brokers, it effectively strips out HFT and instead represents “traditional” order flow.
The same upward trend is clear and so there are definite grounds for cautious optimism. But the real winners will be those that have been using the downturn to rethink their businesses. Firms that have simply reduced capacity may find that they are ill-equipped to take advantage of this new sea of liquidity. More so, as whatever happens to volumes, the game is different now. The proliferation of venues and order types, combined with on-going regulatory churn, demands a different trading workflow. This needs to be based either on scale or specialisation and the firms that achieve this will get the lion’s share of the new liquidity.
Erm…. The start of a trend? January volumes are higher than December. Find me a year when this isn’t the case. You have less trading days in December than January and then the markets are dead for a week at Christmas. This may well be the start of an upward trend, but those graphs do not demonstate that!
Consideration and volume traded are completely seperate metrics and to suggest there is resurgance in equity trading / turnover is a misnomer. The cost base for brokers continues to rise whilst income (commission) and the ability to generate it continues to decline. HFT and algo based systems account for many volume spikes and Volume in UK is concentrated in less than 10 stocks two of which are effectively state owned.
Compliance issues and percieved conterparty risk are the tail that wags the dog now, stifling innovation and entrpeneurial endeavour. A never ending burden of conflicting regulations both domestic and international means that only a few bulge bracket operations or weath managers with income from management fees have any chance of survival. As commissions head to Zero Fidessa should consider how it will get paid (and who by) in future.
Thanks for both comments. Just to be clear – it’s not me claiming the big rotation back into equities, just what I have been reading elsewhere. See these links, for example:
The Great Rotation: a flight to equities in 2013 http://www.reuters.com/article/2013/01/23/us-investment-rotation-idUSBRE90M07720130123; The “Great Rotation” to Equities http://wealthmanagement.ml.com/publish/mkt/campaigns/Outlook-2013/the-great-rotation-to-equities.html; and Is the Great Rotation into Equities Upon Us? http://isharesblog.com/blog/2013/02/01/is-the-great-rotation-into-equities-upon-us-video/
That’s why I talk about cautious optimism, but maybe it is just misplaced. I guess time will tell.
And yes markets are massively more complicated, which is why a rising tide in this case will not lift all boats. Take a look at http://www.fidessa.com/document/2527?ajax=true and http://www.fidessa.com/document/2664?ajax=true which explain how the sell-side is using technology to reposition itself to take advantage of this new world.