Market Participants Face Turbulence Ahead

Terry Flanagan

With the ongoing macroeconomic issues continuing to linger, trading activity and volumes will remain suppressed.

As last year drew to a close and the uncertainty facing the U.S. and European markets remained, market participants noted that there may be more of the same to come.

“As 2011 drew to a close, it seemed that 2012 would not so much see an emergence of entirely new trends but instead a continuation of many of the same developments from the past few years,” said Alison Crosthwait, managing director of global market structure research at Instinet.

Most of the concerns facing investors for much of 2011 have still not been alleviated. Europe’s debt crisis is still front and center, while the U.S. economy continues to be stagnant amid high unemployment and the presidential election looms on the horizon. Investor confidence as a result has remained depressed.

“Nothing has fundamentally changed,” said Crosthwait. “Things are a little bit better, trading volumes are slightly improved, but general investor confidence is not strong. Confidence in Europe is not strong, you’re seeing firms merge or close their doors. It’s a very difficult time, and I would not say that anything has changed fundamentally.”

Trading volumes have been on a steady decline in recent years which has left exchanges venturing outside the core business of matching trades and broker-dealers to consolidate their operations or even shut down. Since the start of the year, average daily equities volume has been in the 6.8 billion range, down from the 8 billion seen in the same period last year. The total number of broker-dealers registered with Finra declined from 4,578 at the end of 2010 to 4,456 at the end of 2011, a drop of nearly 3%.

Instinet handles about 4% of the total U.S. equity volume on any given day.

Declining investor activity along with an increase in trading venues has thinned margins for several execution venues. With 13 equities exchanges and over 40 alternative trading systems, order flow has been scattered.

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