5 Reasons Why Volume Has Died

As you all know, trading volume has been extremely light since the March 2009. When the stock market inflates and trades higher it is usually on the back of extremely light volume. On the flip side, when the stock market declines and trades lower the trading volume will certainly pick up and usually be much higher than the upside action. This is very evident by looking at a daily or weekly chart of the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA).

Why has the volume declined so much over the past three years? There are many reasons for the extremely light volume and we shall examine five of them. Before we unveil each individual reason it is important to understand that these are just some of the major causes of the decline in volume and not all of the reasons. Volume has dropped mainly because the public has lost faith in the system. Mutual fund outflows seem to occur nearly every month. Here are the events that led up to the lack of faith in the investing public and ultimately the light volume.    

1. Financial stock bailouts are probably the single most important reason for investors to quit trading the market. Think about it, the people that failed and survived were hand picked by a group of individuals in the government and the central bank. Sure, there may have been a good reason to pick a company like Goldman Sachs Group Inc (NYSE:GS) and American International Group, Inc. (NYSE:AIG) over other such as Bear Stearns and Lehman Brothers, however, the fact is that they were hand picked and that has left a really sour taste in investors mouths. Most large banks that were too big to fail can still borrow money from the central bank at zero to quarter percent. So while they get money for free and charge you 17.0 percent interest on your credit card; you can understand why people get angry. Just think about the people in the public with savings accounts that earn less than 0.10 percent of interest in their savings account.

2. Goldman Sachs and other investment firms betting against their clients have created a lot of negativity for the investing industry. Now this could be highly debated, however, everyone knows that Goldman Sachs allowed hedge fund manager John Paulson to pick and make a portfolio of mortgage backed securities to sell short (bet that the portfolio would decline). This deal was one of the biggest events that was ever revealed to the public. Many investors have simply lost trust in the investing community after this was deal was discovered.

3. The flash crash which occurred on May 6, 2010 shook investor to their core. On that day the stock market dropped over 1000 points in just a few hours before bouncing back and closing down around 400 points by the close of trading. The decline was blamed on a fat finger trader who was never identified. Just tell people what likely caused it, a real stock market panic.

4. The MF Global bankruptcy was another reason why people just lost faith in the entire financial system. This company was run by Jon Corzine, the former CEO of Goldman Sachs. He was also the former governor of New Jersey and a former U.S. senator. Jon Corzine obviously made a bad bet in the stock market and lost money in client funds from the brokerage division. These funds should have been segregated and not commingled in the investment arm, however, the investigation is still on going so all of the facts are not yet in. This is certainly another reason for the trading volume declining.

5. Last but not least, the recent bad bet made by J.P. Morgan Chase & Co (NYSE:JPM). The company is said to have lost $2 billion on a hedging strategy. Who really knows what to think? A hedging strategy is supposed to be in place to prevent a big loss. The details are still vague at this point in time, however, it is still another event that will keep the public out of the market.

There are many other reasons that could have been mentioned such as the robo signing by the large banks, the European financial crisis, and endless central bank intervention for the top financial companies. There are many more reasons; we would have to write about ten more pages to list all of the reasons.