Trading for customers in both equities and bonds has been a busy and lucrative activity this past year. But the stock market's strong performance is denting both volatility and trading volumes, which could undermine demand and commissions for flow traders in 2010.
The Wall Street Journal neatly summarizes the dilemma like so: "On Wall Street, even as the market giveth, the market also taketh away."
Statistics on diminished stock-trading volume in both November and December and a 16-month low in the CBOE Volatility Index (VIX) haven't escaped notice of equity analysts who cover Wall Street firms. The Journal cites several recent earnings downgrades - running the gamut from full-service houses like Goldman Sachs and Morgan Stanley to online retail brokerages like TD Ameritrade. For instance, Barclays analyst Roger Freeman estimates Goldman's bread-and-butter fixed income, commodities and currencies trading business will bring $4.4 billion in revenue this quarter, down 30 percent from the third quarter, while stock-related revenue will decline 25 percent to $2.1 billion. He blames "declining observable volumes and volatility."
The key question is whether the recent trading dropoff is largely seasonal. Volumes typically shrink as year-end approaches, because hedge funds and other active traders seek to protect the year's gains.
On that question, the Journal's story conveys little certainty. Although trading volume and volatility are down sharply year-over-year as well as quarter-over-quarter, the story's sources mention mostly seasonal reasons, along with other technical factors such as outflows from stock mutual funds. Sanford Bernstein & Co. analyst Brad Hintz says trading activity might rebound early next year because traders' appetite for risk will revive after they've locked in their bonuses.