Last Updated: 26 May 2021
US ETF trading volume plummeted nearly 64 percent in August from a year earlier, staging an even steeper decline than the drop seen in individual US equity securities, and it looks like volatility or a lack of it is partly to blame.
Indeed, the New York Stock Exchange saw average daily trading volume of its cash products slip some 50 percent in August from the same 2011 period, while derivatives trading slipped nearly 40 percent, the exchange reported recently.
NYSE-listed ETFs alone saw trading volume drop by nearly three-quarters in August vs. year-earlier totals—about 3 percentage points more than data compiled by IndexUniverse, which include NYSE, Nasdaq and BATS numbers.
The drop in ETF trading volume is of particular note given the fact that between August 2011 and August 2012, some 200 new ETFs were added to the list of ETFs trading in the US, according to data compiled by IndexUniverse. In other words, more US-listed ETFs didn’t necessarily translate into higher trading volume.
Still, the sharp decline in trading activity may not be grounds to worry too much, in part because the year-earlier figures—driven by heightened anxiety surrounding events like the contentious US debt-ceiling talks in the summer of 2011—were unusually high, according to Nicholas Colas, of ConvergEx Group, the New York-based trading and technology firm.
The decline in trading volume, in broad perspective, is a seasonal event, Colas told IndexUniverse, noting that by and large, equities trading—and ETFs trading for that matter—tend to slow down in August. Historically, trading volumes have accelerated into the fall months and slow down again during December’s holiday season, he added.
The takeaway here is also that this year’s average trading volume totals for August weren’t necessarily terribly low, so much as volume figures in August 2011 were unusually high, Colas said.
Some 17.72 billion ETF shares traded in the month of August compared with nearly 49 billion a year ago, when the fractious debt ceiling debate in Washington, DC and the S&P downgrade of US sovereign debt completely roiled markets.
“The drop in trading volume shows just how turbulent markets were a year ago when investors—and market participants—were reacting to a whole range of crises,” Colas said.
All those factors helped spike volatility levels and contribute to higher trading volume, Colas said. The higher volatility levels are, the more profitable it is for market participants to arbitrage between dark pools of capital—thanks to changes in market structure, Colas said.
“Now that the VIX is at 14—it usually averages 20—profits have dried up in high-frequency trading,” Colas said. Lower profits, in turn, have contributed to a decline in trading volume, he added.