This Sunday marks the second anniversary of the May 6, 2010 Flash Crash, when major North American indexes went into a freefall in a matter of minutes, before recovering just as fast. About 300 securities fell more than 60 per cent in moments, in some cases reducing formerly robust share prices to pennies. Is there a fallout from the Flash Crash? You bet – and it comes in the form of low trading volume today.
Joseph Saluzzi and Sal L. Arnuk, co-heads of the equity trading desk at Themis Trading LLC and authors of the forthcoming book Broken Markets, argue on The Big Picture that there is no mystery behind why the NYSE Euronext Inc. recently saw its quarterly profit fall 44 per cent amid dwindling volumes:
"Investor volumes are down because traditional retail and institutional buyers and sellers of stock have been steadily waking up to the dangers of drinking at the increasingly dangerous 'stock market watering hole,'" they explained.
"Like the animals on the Serengeti, who for years were accustomed to sipping long and heartily at their favorite spot, retail and institutional investors now see what's beneath the surface. And they are deciding that the drink they crave is just not worth the risk."
They are referring to high-frequency traders -- mechanized, high-volume trading that moves in and out of stocks in seconds, making a mockery of buy-and-hold strategies. These traders were blamed for the Flash Crash.
Mr. Saluzzi and Mr. Arnuk provide an interesting perspective on the ramifications. But there's also an upbeat lining here. Low trading volumes have often been cited by bearish observers as a keen reason to stay skeptical about the stock market. As their reasoning goes, low volumes reflect little confidence in the stock market at its current heights, with the Dow recently hitting its highest levels since late 2007 – with a few stumbles since then. The bearish concern is that the stock market is running out of buyers to drive it higher.
But if investors are merely distrustful of equity markets and are steering clear because of what they saw in the Flash Crash, there might be reason to believe that low volumes aren't that bad after all.