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Thursday, May 10, 2012

Retail investor wises up, stays on sidelines

R Sivanithy10/5/2012

RETAIL investors have traditionally been given the short end of the stick, with brokers, banks and exchanges placing greater emphasis on big players such as institutions and high-frequency traders (HFT) because of the vast liquidity these sophisticated players can generate.

Yet despite the proliferation of HFT and other forms of computerised trading in today's markets, volume all over the world is falling. As experts puzzle over the reasons, a novel hypothesis is readily available - the humble small investors, having grown tired and disillusioned with the way markets have evolved, have withdrawn from stocks and it is their absence which may well explain the volume loss.

The New York Times (NYT) reported on May 7 that trading in the US stock market has fallen since the 2008 sub-prime crisis and has continued to fall with the average daily trades on all US exchanges in April amounting to 6.5 billion units, about half the 12.1 billion done at the 2008 peak.

Also reported was that the New York Stock Exchange last week said first-quarter trading business was 23 per cent lower than in Q1 2011.

Over in Hong Kong, Reuters on Monday reported that turnover in shares traded on the exchange fell in January-March to HK$63 billion from HK$75.3 billion a year earlier. Meanwhile, the Singapore Exchange (SGX) last Friday announced that although its derivatives turnover grew 29 per cent year-on-year for April, securities turnover was 27 per cent down at $23.5 billion and that average daily value in securities was 27 per cent lower at $1.2 billion.

According to data compiled by the World Federation of Exchanges, 48 of 52 exchanges it tracks suffered double-digit falls in turnover for the first quarter this year compared with 2011. The four exceptions were Bermuda, Brazil, India and Saudi Arabia.

This global drying of liquidity in equities has occurred despite zero interest rates, rising earnings and central banks like the US Federal Reserve and the European Central Bank standing resolute as lenders of last resort to markets in case of collapse.

For the past four years since Lehman Brothers went bust, this kind of support from officialdom has meant stock markets all over the world have been resilient, occasionally suffering large losses when recession worries surface but always bouncing back, usually stronger than before.

This is because explicit guarantees of near-unlimited injections from monetary authorities remove a large portion of equity investment risk. If so, then one would quite reasonably expect stock market participation - both retail and institutional - to rise, not fall. So why is volume all over the world dropping?

No conclusive reasons have been found but from the various hypotheses that have been put forth one crucial point emerges - retail presence is just as vital as any other.

NYT quoted US observers who believe declining liquidity is because high-speed traders have scaled back their activities for two reasons - more regulations aimed at curbing their activities and the departure of retail investors, a group that the high-speed players exploited to make money.

More regulations are to be expected given the concerns relating to front-running and manipulation often associated with rapid-fire computerised trading.

The withdrawal of retail players, however, is interesting because it suggests that this group has wised up to the folly of trying to compete against opponents who can plough vast sums into building computers that can react a million times faster than humans.

"On a typical trade, two HFT firms will not trade against each other," a US HFT trader was quoted in the NYT article as saying. "For most established firms, if ordinary investors don't want to trade, there's really nothing for us to do."

HFT doesn't really contribute to Singapore equity market volume but anecdotal feedback from dealers and the local broking community is that retail investors here, having been burnt repeatedly over the years by market calamities such as 1998's regional crisis, the dotcom bust of 2000, the 2003 Sars epidemic, the 2008 US sub-prime collapse and the ongoing European sovereign debt crisis, have departed the market - mostly in favour of real estate.

Notwithstanding data from SGX that over the past 10 years money invested in the Straits Times Index would have earned a better return than if invested in property, an unshakeable belief persists that investing in bricks and mortar is safer and surer than investing in stocks. Not surprisingly the real estate market has continued to defy the odds and it remains resilient despite the government's strong anti-speculative property measures.

Adding to the disillusionment with Singapore equities is a dearth of quality listings, the scandals associated with China stocks that have depressed the entire China segment and a system that allows new companies to place out all their shares to selected investors, thus leaving either nothing or only scraps for the man in the street.

There are, of course, other contributory factors. Europe's constant debt problems and the continent's current anti-austerity wave that threatens bailout efforts, the on-off US economic recovery and China's probable hard landing are shrouding the investment outlook with uncertainty and are likely keeping many investors out of the market.

Also, exchange volume has probably been hit by attractive alternatives such as dark pools which can transact large parcels faster and at lower cost.

But for countries whose equity markets have HFT, it is ironic that a probable factor behind declining volume is none other than HFT itself, an activity that was encouraged because it was supposed to boost liquidity in the first place. - BT

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