An investor looks at a board showing stock index at a brokerage house in Hefei, in central China's Anhui province.
Some technical analysts have been pointing out that trading volume within the stock market has been quite low recently, underscoring the uncertainty among investors in the market's recent rebound from bear-market lows. Now, the Wall Street Journal's Tom Lauricella and Gregory Zuckerman highlight another weak spot in the market: liquidity.
In conversations with hedge fund traders and mutual fund managers, they point out that it has become increasingly difficult to trade large volumes of a stock without having a big impact on its price. Even actively traded stocks, such as Apple Inc. and Netflix Inc., have been affected by this trend. This partly explains why market volatility has been so high recently, with 1 per cent daily swings in the Dow Jones industrial average now the norm. (On Monday, the Dow fell 2.1 per cent.)
This has created a kind of chicken-and-egg scenario: With low liquidity and trading volumes, volatility is high; and high volatility is keeping many investors on the sidelines, contributing to low liquidity and low volume. The lack of liquidity can be seen in the relatively high spreads between buying and selling prices -- otherwise known as bid and ask prices -- which might look razor-thin to retail investors trading a couple of hundred shares but can look enormous to the big players who might be trading millions of dollars worth of shares.
Meanwhile, traders see little chance of the trend reversing, given the uncertain backdrop in the global economy, the inability of governments to agree on policies and the fact that banks are retreating from risk. In other words, expect more market volatility ahead.
David Berman