The following is a guest post by Charles H. Dow Award winner, Wayne Whaley (CTA) of Witter & Lester:
One of the aspects of the 2009-2010 market rally that has confounded many market quants and market technicians is the fact that the advance has supposedly occurred on low volume. Some are calling the rally into question because of it while others, like Lowry Research, don't believe it is an issue. Below is a chart showing the average annual volume for issues traded on the NYSE floor since 1970:
Here are a few quick observations:
- The largest annual average volume in history occurred in 2006
- And even with record volatility in 2008-2009, volume has declined four straight years
- The first time in the last 40 years, we have had even three straight declining volume years
In the 1982-1983, 1987, and 2001-2002 bear markets, volume expanded with volatility. The only other bear market that has occurred in declining volume was the one during 1973-1974. This is not the first study I that have done that strongly parallels 2008-2009 to 1973-1974. The question then becomes, "If the declining volume is legitimate, what occurred in 1973-1974 that is similar to the last bear market?" That is a study in and of itself.
The second and most likely explanation for the declining volume is that in the last decade, Electronic Communication Networks (ECNs), Crossing Networks, and Dark Pools have allowed for transactions of NYSE issues that do not necessarily end up being recorded as daily NYSE volume.
It is likely, that the NYSE activity has not declined in as much as the players have simply migrated to other playgrounds and this is a trend that could still be in its genesis. If this is the case, technicians that rely on long term volume studies will be forced to convert to a more encompassing volume count.
Edit: Babak here, I thought I'd add this chart to Wayne's discussion of volume - from the research paper titled Trading in the 21st Century by Prof's Angel, Harris and Spatt.
A more aggregate measure of volume is provided by the NYSE here. There, they define two different data sources, NYSE Daily and NYSE Group. With the explanation that Group includes volume executed at NYSE Arca (electronic).
You will also note that on Yahoo's finance stats page, they state that their volume includes volume from pre-market and regional exchanges and their daily volume vastly exceeds that which is listed as floor volume.
In the one volume analysis in my model, I use a trailing 5 and 20 day volume total relative to a trailing one year total on the traditional NYSE volume data and then do pattern recognition on the relationship compared to prior historical data points that are at similar levels and in similar price trends. My instincts are that given that I am using a trailing one year comparison, this is a valid approach, but it is under review. The above is an output of some of the background research that I thought you might appreciate and possibly benefit from.ARCA, CTA, dark pools, ECN, guest post, listed market, NYSE, structural change, volume, Wayne Whaley
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