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Markets Ruined By Too Much, Too Little Liquidity

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A cool thing about financial markets is that every trade has two sides, so everything that happens, someone can complain about. "Economic growth is too robust!," someone probably says, when it is.

Does that help explain the difference between this CNBC article about investors who are mad that there's too much trading in the financial markets, and this Bloomberg article about investors who are mad that there's too little trading in the financial markets? Compare these stats:

While companies raise about $250 billion a year in equity financing through IPOs and additional equity offerings, [Vanguard founder Jack] Bogle said there's $33 trillion worth of trading going on, "which is [bad]."

With these stats:

Average volumes of bonds changing hands each day this year represent 0.29 percent of the market’s face value, according to data compiled by Bloomberg and Trace, the Financial Industry Regulatory Authority’s bond-price reporting system. That’s down from 0.32 percent in 2011 and 0.5 in 2005. ...

An average of $16.93 billion of investment-grade and high- yield bonds traded every day this year as the value of outstanding corporate bonds rose to $5.72 trillion, according to Finra and Bank of America Merrill Lynch index data. … Dollar-denominated corporate bond issuance of $1.4 trillion this year is up from $1.13 billion in 2011 and surpassed the previous record of $1.24 billion in 2009, Bloomberg data show.

So ... probably not, right? Just different markets. Bond volumes are famously drying up due to impending Volcker bans on prop trading, increased agita about allocating capital to trading books at banks, etc., while stock volumes are famously zoomsploding due to high frequency trading and evil speculators who are only in the financial markets to make money, the jerks.1

But if you take the numbers in those two excerpts and sort of throw them all together you get ... I dunno, what do you make of this?

One thing to make of it is that stock and bond volumes are not actually all that different measured as a percentage of the stock outstanding. The average share of stock2 turns over in about six months; the average bond turns over in about sixteen months. That's different, but it's not nanoseconds-versus-never-trading-again different.3

Where the differences are huge is in the comparison that Bogle makes: bond market trading volumes are a fraction of bond market new issuance, but stock market trading volumes are a multiple of stock market issuance. The paradigmatic stock trade is an investor/speculator/robot buying stock from another investor/speculator/robot - or, increasingly, a corporation buying back its stock from investors/speculators/robots - not a corporation funding itself by issuing stock. The paradigmatic bond trade is an issuer selling a bond to an insurance company, the insurance company putting it in a metaphorical drawer, and the issuer paying it off ten years later. From Bloomberg:

"A lot of the new deals just get put away and then people, quite frankly, hoard those bonds,” [a guy] said. “So you don’t see a lot of trading, partly because of that, and the other aspect being the regulatory environment.”

A lot of the old deals too I'd guess.

Anyway! One fun thing to ponder is: if you're a good upstanding non-speculator investor-type - Vanguard, say, or someone similar but less indexy - and you are in the [stock / bond] market, would you trade the woes of your market for the woes of the [bond / stock] market? Would you prefer to get whipsawed and ripped off by the robots and speculators who provide too much liquidity, or trapped and ripped off by the dealers and regulators who provide too little? And how does that inform the prospects for efforts - de-decimalization on the one hand, electronic bond crossing platforms on the other - to make the stock market more like the bond market, or vice versa?

Market Speculation Is a Bigger Threat Than ‘Cliff’: Bogle [CNBC]
Bond Hoarders Squelch Trading in Record Issuance: Credit Markets [Bloomberg]

1.Incidentally I don't mean to pick on Bogle; you can find a thing about "EGADS TOO MUCH SPECULATION IN STOCKS" pretty much anywhere you look. I came to Bogle's from this nice takedown on Sober Look. The Bloomberg piece is also pretty representative of a genre of "EGADS NO ONE TRADES BONDS"; here is an interesting skeptical take on that theme.

2.Ooh that's a price-weighted average share, if you care.

3.If you feel disinclined to believe Bogle's et al.'s numbers, you can try to replicate them yourself. You can play with the spreadsheet but here's another set of numbers that I find sort of congenial:

I don't know that that changes how you'd think about anything but it makes for like 4 months for a share of stock to change hands vs. 24 months for a bond.

Anyway also totally read the Bloomberg article, which discusses concentration of bond volumes in index names, premiums for liquidity, etc.


(Trump image courtesy Flickr user Gage Skidmore)

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