Both sides of the investing business have felt the impact of slash-and-burn cost-cutting tactics in recent weeks, from the 10,000 jobs to be cut at investment banking giant UBS AG to the $250-million (U.S.) of savings targeted by market operator NYSE Euronext Inc. If trading stocks isn't a dying art, it's certainly a shrinking one.
Behind the cuts are tumbling revenues that reflect a severe, and persistent, plunge in trading volumes across the world's major markets.
Volumes on the S&P 500 this year have been less than half of their pre-financial-crisis norm. Canada's S&P/TSX composite index had its weakest quarterly volume in more than six years in the third quarter. The MSCI World index, a composite of the developed world's stock market indexes, suffered an eight-year low in volumes last quarter, and is on pace to post its fifth consecutive annual decline.
The first instinct is to blame the 2008-09 financial crisis and market crash for scaring investors away from stocks, and there's certainly some truth to that. The most damning evidence is in the mutual fund numbers: Since the middle of 2008, a net $444-billion (U.S.) of investor money has been withdrawn from equity mutual funds in the United States. In Canada, equity mutual funds have suffered net withdrawals of more than $23-billion (Canadian) over the past two years.
But a strong case can be made that those mutual fund data reflect not an abandonment of the stock market by fund investors, but rather a large-scale shift out of mutual funds in favour of exchange-traded funds (ETFs).
Equity ETFs now account for nearly $1-trillion (U.S.) in investor assets in the United States, and $34-billion (Canadian) in Canada; their size has doubled since 2008. Roughly $80-billion (U.S.) of investor funds have flowed into equity ETFs in the U.S. market, and more than $4-billion (Canadian) in Canada, this year alone.
That goes a long way to offset the money that has been coming out of equities through the mutual fund industry. It also goes a long way toward explaining how the market has become starved of trading volume.
By their nature, ETFs pool trades of large numbers of investors, most commonly in low-turnover, buy-and-hold funds that mimic broad market indexes. The result is that instead of many people doing many trades, a comparatively small number of funds make comparatively few trades.
It's hard to imagine the trend toward ETFs and other index funds reversing. These products offer the security of diversity while minimizing costs to investors – both key considerations in volatile markets. Add to that the post-crisis shift in investor preference away from risk, and the drift toward bonds as more investors approach retirement – not to mention growing calls for regulatory curbs on computerized high-frequency trading – and it's hard to see how market volumes are going to get their pre-crisis mojo back.
The new low-volume normal means that trading brokerage houses as well as banks are going to see their trading businesses shrink. And that implies falling profits at the market operators that until recently were considered near-unshakeable cash cows.
And, yes, it's going to mean more firms in the equity business slashing their head counts – in Canada as well as abroad. There's just not enough work for all those traders any more.
David Parkinson