08.17.2011
By Terry Flanagan

B-Ds Prep for Lower Volume

The sharp spike in volatility seen in the first half of August was a boon for market participants, including broker dealers, who have been struggling with down trading volume for much of the year. But with the markets returning to more normal activity, it’s a reversion to what broker-dealers are used to seeing this time of the year.

“In markets as volatile as this, there’s always an initial burst of activity, and then you have to prepare for it to go down,” said Mark Goldwasser, chief executive officer of National Securities Corp., a full service broker-dealer. Goldwasser points out that the summer months are traditionally slower, so any short-term spike in volume is seen as a welcome surprise.

“It’s the middle of summer, we’ve been planning on summers being periods of reduced volume, and for summers seeming to be increasingly longer,” said Goldwasser. “This year, there’s generally been good activity through July, and then the crisis came in August. Broker-dealers have been planning for quiet summers for many years, so on a short-term basis, the crisis actually helped some of the activity for a few days.”

In preparation for the lean summer months, broker dealers are more keen to better manage costs, especially during times of prosperity. “You’ve got to run the business as lean as possible, you can’t get carried away during bull phases,” said Goldwasser. “You’ve got to think about the rainy day and plan for it. Most that have survived this long understand that. We’re in perpetual cost cutting efficiency mode.”

According to BATS Global Markets, equity trading volume has been declining daily since reaching a peak of nearly 18 billion shares on Aug. 8. Volume has declined by more than half during the week following, with about 8.2 billion shares changing hands on Aug. 15. The Chicago Board Options Exchange’s Volatility Index, or VIX, has been on a similar decline in the same time period. The so-called fear gauge has fallen from a year-to-date high of about 48 on Aug. 8 to about 32 at the close of trading on Aug. 15.

“The good news is the summer ends soon, and normally in September you see an uptick,” said Goldwasser. He asserts that with all the volatile market conditions seen in the past decade, investors and broker dealers alike are becoming used to the upswings and the downturns. He also added that the selloffs that invariably come with each downturn are usually just an unfounded panic reaction. “It’s normally too late to sell, it’s better to hold in the couple of months of crisis.”

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