“Bond Trading” Fixed Income Market Boom and its Impact on Stock Market Volumes

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Martha Stokes, CMT  Martha Stokes, C.M.T. is the co-founder and CEO of TechniTrader, an educational firm dedicated to helping small investors and retail traders since 1998.

Fixed Income assets have been a strong area of the financial services industry as Quantitative Easing invigorated Bond Trading.  This led to a steady and obvious decline in stock market volumes.  This was one of the unexpected side effects of intervention of the Federal Reserve as it sought to shore up the failing banking industry which underpins the economy. However the Bond Market has been showing sudden declines in volumes in the past months.

After the banking debacle and the initiation of the Quantitative Easing program by the Feds, Bond Markets rallied with high speculation and heavier than normal trading.  This created more activity as funds rushed to participate in short term trading speculation.  Fixed income assets saw a surge of steadily increasing volume while the stock market and stock options markets saw a steady decline.

Bond Markets are now facing a future where Quantitative Easing will no longer be driving money into the fixed income market.   This poses the question of whether the high volumes of the past will return to the stock market, or if Brokers/Dealers and the Sell Side Institutions who sell products to smaller funds must readjust their business plans to a significantly lower volume in stock trading.  Stock market volume declines have strained the Sell Side Institutions profit margins as well as the Brokers/Dealers for both the professional side and the retail side.

Stock Market Volumes have been falling since the inception of the increase in the first round of Quantitative Easing. Volumes for the Dow and S&P500 further declined as the Mutual Fund and Pension Fund industries took a buy and hold stance, rather than the high levels of short term trading activity they did after the Rule of 3 was eliminated in 1998. This initial fervor for short term trading by the funds decimated the Mutual Fund industry, when investors redeemed Mutual Fund monies in 2002 as they discovered not only had the Mutual Funds lost money on their behalf, they owed taxes on the short term trades.

Mutual Funds have been rebuilding first by using the now highly popular Exchange Traded Funds ETFs, and by showing Mutual Fund investors they intend to be long term rather than short term on their behalf. Pension Funds have risen over the past two years, boosting the amount of money held long term. The combination of Bond Market trading popularity with the buy and hold stance for Mutual Funds, Pension Funds, and Derivative Product developers is the primary cause of the decline in volumes traded for the big index stocks.

The link between volumes traded for the Dow and the S&P500, and the surge of increased volumes for the Bond market are clearly indicative of Quantitative Easing and where the money from the Feds ended up.  Now with Quantitative Easing ending, the Bond market rally is showing signs of weakening.

If money is pulled from short term trading Bonds, it will find its way to some other financial trading instrument. A debate continues as to whether this means renewed surges of short term trading activity for stocks will return, or if the buy and hold posturing of the giant funds will continue to keep stocks at lower volume levels than in the past. Just keep in mind that stock values also are tied to supply and demand as much as any other product.

 Martha Stokes CMT and CEO of TechniTrader®
TechniTrader® "The Gold Standard in Stock Market Education™"
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Member of Market Technicians Association
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Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
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