Bear Market Results in Reduced Trading Volumes

In the current bear market, plenty of attention is being focused on investors and the negative impact this is having on their investments. Advice on how to handle the situation abounds, with the general view being that riding out the storm may be the best option. But while sympathetic sentiments are being expressed for investors, spare a thought for the people who make their living from managing other peoples’ investments.

In addition to Nasdaq OMX and NYSE Euronext facilitating trade in other stocks, they list their own shares, and the harsh reality is that the value of equities for both of these stock exchange giants have virtually been sliced in half since the beginning of 2008. This ongoing fog of doom and gloom hanging over the stock market is resulting in a marked slowing down of trade on NYSE and Nasdaq’s U.S. equity platforms, which in turn makes them less profitable. The market is considered to be a bear market when major indexes decline by 20% below their peaks, which is the current situation. In view of this, it is understandable that investors have little enthusiasm for trading shares at the moment, and reduced trading is synonymous with reduced commission income.

The volatile market, which was experienced during late 2007 and in the first half of 2008, resulted in large trading volumes as investors attempted to build secure investment portfolios. All this frantic activity proved to be beneficial to stock exchanges. However, the volatility is subsiding and investors are coming to terms with the reality that the current bear market is likely to be around for some time, with many choosing to wait it out.

Unfortunately investors have good reason to be pessimistic as fuel prices soar, inflation creeps up relentlessly, the housing market takes a knock and ongoing credit woes wreak havoc. Add to this the disappointing corporate earnings of the first two quarters of 2008, and it is clear that there is little to be enthusiastic about.

Nasdaq’s chief financial officer, David Warren, points out that investors may be putting too much emphasis on Nasdaq’s trading business and losing sight of the fact that it is not purely a trading company. U.S. equity trading accounts for about 16% of Nasdaq’s revenue, with additional revenue being generated by the sale of market data and collection of fees payable for connecting to Nasdaq’s trading systems. Moreover Nasdaq offers a host of services to companies that list on the exchange, as well as providing technology to other stock exchanges world-wide.

Nasdaq’s merger with Nordic stock exchange OMX may have reduced its reliance on stock trading, and the same may be said for the 2007 NYSE-Euronext merger. Nonetheless, industry experts remain convinced that trading volume is a key factor in the profits of large stock exchanges and as the bear market prevails, reduced trading volumes will take their toll.