Bank buildings tower over the corner of Bay Street and Adelaide streets in Toronto.Gloria Nieto/The Globe and Mail
Even as Canada's largest equity market closes in on its post-crisis peak, trading volumes remain stuck in a rut – and no one seems to know why.
Although the S&P/TSX composite index is back above 14,000, trading volumes this year are 20 per cent lower than they were during the first two months of 2011, the last time the TSX was on fire.
The trend is baffling Bay Street. Although institutional traders have long voiced their frustrations with the lacklustre volumes, even retail flows are suffering, confounding a completely different set of market players.
The most troubling thing: it's too hard to pinpoint a precise reason as to why this is playing out. Conventional wisdom would have you believe that investors are happy to buy back into a market as they watch it soar, yet so many people remain on the sidelines.
From conversations with people on the Street, it seems as though low market volatility is a leading problem. You might assume that a steady rise would give people confidence, but it hasn't helped trading volumes much. Instead, when markets are volatile, money managers continuously reweight their portfolios, and short-term investors are much more likely to buy and sell at what they believe are the highs and lows for individual stocks.
People also forget that roughly 15 per cent of Toronto's trading volume stems from derivatives activity, and these trades are highly correlated with heavy volatility. When the market's moving around a lot, derivatives traders need to adjust the portfolios to meet their stated objectives.
Then there are finicky retail investors. The banks are learning that some of them feel like they've missed the rally, because the TSX is already up 12 per cent in the past six months. Rather than buy into the rise, many are waiting for a pullback that may never come.
There are some silver linings. To start, this isn't just a Canadian phenomenon. Trading volumes for the S&P 500 this year are 32 per cent lower than the same period in 2011, even though the index is up 23 per cent in the past 12 months.
And in Canada, trading volumes have actually rebounded. During the last three months of 2012, the TSX's average daily volume amounted to roughly 162 million shares a day. In January and February, the average volume was 186 million shares a day.
Plus, if you look at the market a different way, the dropoff doesn't seem so scary. When analyzing the value of stocks traded in the U.S., rather than volumes, market activity has been rather steady for the three years, according to ITG Canada. In other words, even though volumes are sinking, rising stock prices have more or less served as an offset. However, that doesn't offer much solace to people who are paid per trade.
There's another dynamic to consider, too. If volumes were extremely heavy, you could assume retail investors were "panic buying," and that usually signals the last legs of any rally. That doesn't appear to be happening, and that could be a good thing.
Tim Kiladze