By Christine Hughes, Canada. Chief Investment Strategist, OtterWood Capital:
The number of shares trading hands has fallen significantly since the dotcom bubble. As per a recent report from RBC Capital Markets, part of the decline is due to the Volcker rule which restricts certain trading at big banks. Another reason is that high frequency trading volumes are down because the markets aren’t as volatile.
But the real killers are the growth in ETFs which re-balance (sell/buy shares to fit different internal criteria) much less frequently than actively managed funds, and the diversification into futures and options.
Why do we care about this?
Higher volume generally means higher liquidity. Lower liquidity isn’t a problem until the selling starts. But when the selling starts, suddenly you have a tougher time selling what you own, i.e. you’re able to sell it only at a much lower price than you want. By Christine Hughes, OtterWood Capital
Global growth is languishing, corporate revenues too, but CEOs are trying to show they can grow their companies the quick and easy way. Cheap debt is sloshing through the system while yield-hungry investors offer their first-born to earn 5%. And this cheap debt along with vertigo-inducing stock valuations have created the largest M&A boom the US has ever seen, with May setting an all-time record. Sense of desperation among CEOs? Read… Last Two Times This Happened, Stocks Crashed