08.09.2011
By Terry Flanagan

B-Ds May Gain from Market Tumult

The Standard & Poor’s downgrade of United States debt, although expected by many, caused a shockwave throughout the marketplace, further exacerbating eroding investor confidence and sending equity indices worldwide into a tailspin. However, the resulting uptick in volatility may be the shot in the arm needed to boost slumping broker-dealer profits.

“One perverse positive for financial institutions, especially those involved in the equity markets, is the spike in volatility, which increases trading volume and revenue for broker-dealers,” said Daniel Greenhaus, chief global strategist at BTIG.

Volatility, as measured by the Chicago Board Options Exchange’s Volatility Index, has been on the rise in recent weeks as mounting debt loads in the U.S. and Europe continue to put a damper on investor confidence. The VIX, known as the ‘fear gauge,’ in the past month has more than doubled to about 38 as of midday Monday. CBOE on Aug. 5 set new single day volume records for the trading of both VIX options and futures contracts.

Overall trading volumes have continued to slump as of mid-year. Equity trading volume is down as much as 30 percent compared last year, according to some industry estimates. Although the short term spike in trading activity will most likely not be enough to substantially affect the year’s average daily volume, Greenhaus expects the volume from the last week “will be highest of the year if not the last two years.”

According to BATS Global Markets, 16 billion equity shares changed hands on Aug. 5, which was the heaviest volume for the year. That bested the previous day’s high mark of about 14 billion shares.

In the short term, the downgrade will clearly put a significant damper on an already fragile investor psyche. But looking ahead, Greenhaus expects some positives to result from the situation. “If the downgrade leaves legislators down a path of fiscal normalcy, it can be the best thing to have happened to the U.S. in quite some time,” said Greenhaus.

He believes that the downgrade may force legislators to more efficiently compromise with each other with regards to fiscal policy negotiations. “The medium- to long-term fiscal picture will be better, and the investing landscape will be better,” he said.

However, Greenhaus maintains a wary outlook.

“It’s an incredibly tenuous situation,” said Greenhaus. “The U.S. economy is skating on the thinnest of ice, and is one shock away from recession. We believe there will be no recession, but growth will be anemic for the next three to four quarters.”

Related articles