Electronic trading slowdown alert

The continuing decrease in volume reported by the US’s largest electronic trading groups has triggered a fear among analysts that the fall in market activity might be more than a seasonal phenomenon.

Trading-focused groups such as ITG, Knight Capital and Charles Schwab enjoyed upbeat second quarters when the European debt crisis sparked extreme volatility. As fear has given way to unease with the global economy, however, trading volumes have fallen sharply.

“You’re starting to see some real pain,” said Christopher Allen, an analyst at Ticonderoga Securities. “September is not a material improvement over August. Aside from possibly the US election, I’m not sure what the catalyst is for trading.” A record-long streak of outflows from equity mutual funds – now 20 successive weeks beginning in May, according to the Investment Company Institute – and reluctance by even normally bold hedge fund managers to take big bets has suggested that there are more than seasonal factors at work.

Mr Allen’s figures, compiled last week, show that trades for the trading industry are down 8 per cent so far in September from August, when trading fell to a three-year low.

Ticonderoga has lowered its third-quarter earnings estimates for ITG, an agency brokerage, and Knight Capital, an electronic market maker. Analysts at Sandler O’Neill also lowered their estimates for those groups, and Keefe, Bruyette & Woods lowered its forecast for Interactive Brokers, an electronic brokerage.

“Most companies felt that near-term declines in volume could remain for some time,” said Richard Repetto, an analyst at Sandler O’Neill, after interviewing the management of several trading groups.

The fear in the industry, according to Mr Repetto, is that changes in market structure are altering trading flows in ways that will extend beyond the summer, or even beyond a turn in sentiment for the economy.

Diego Perfumo, an analyst at Equity Research Desk, said that efforts by global regulators following the May “flash crash” were reducing volumes by high-speed firms, which was making it more difficult for other investors to trade.

“Higher trading scrutiny combined with tighter regulation is drying up the liquidity provided by high- frequency traders. Lower liquidity is symbiotically affecting volumes from traditional investors,” he said.

Charles Schwab, the retail brokerage, said last week that trades in August fell 16 per cent from a year ago. TD Ameritrade, a competitor, said it saw a 36 per cent drop in August.

Mr Perfumo pointed to the closing of proprietary trading desks at commercial banks as they consider how to meet new provisions in the Dodd-Frank bill.