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Money flows

While it is well established that the share of program trading in NYSE exchange has shown a trend of significant upward movement over the past few months, we have made an attempt to look into the flow of money in and through program trading. A granular look at events witnessed in the recent set of trends makes us come to the following findings:

  • 1. Dark pools, an increasingly popular off-exchange electronic trading venues where buyers and sellers can fill large orders anonymously, have grown to account for a significant amount of total equity trading. Their share in the total average daily volume in the US is expected to be around 10% currently. The impact of these transactions in terms of price distortion is expected to have increased significantly with increase in program trading. See Institutional Investor's final issue for an expose on Dark Pools - "Gaming takes many forms, including what participants commonly refer to as "fishing." In this tactic the gamer pings a pool with small sell orders for a stock in an effort to discover if a large buy order is resting there. If these orders keep getting filled, the next step is to move the stock price up by buying it on the public market. The gamer then dispatches a big sell order to the dark pool — and unloads the shares for more than the original purchase price.".

The share of program trading in total NYSE volumes has increased to as high as 40% for the week ended June 19, 2009 with total NYSE market volumes in 2009 being lower than the last year. As a result, program trading volumes (including dark pools) are estimated to have turned more influential in determining market movement than ever before.

 image001_copy.png  

image002.png 

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In the charts above we have plotted S&P Index (June 2006 to date) with (1) total NYSE volumes (2) total program trading volumes share (in total NYSE volumes) and (3) GS program trading volumes share (in total NYSE volumes). Between February 2009 and June 2009, the markets have rallied around 25% but the rally has not been backed by what would be a bull's desired volume increases. Total NYSE volumes have spiraled down while program trading volumes have moved up. Average daily NYSE volumes have declined 18% over corresponding period last year and 23.5% over average volume for 2008, while program trading volumes have increased 1.8% over corresponding period last year. With a decrease in overall volumes and marginal increase in program trading volumes, the share of program trading in the overall market volumes has increased significantly - rising to 30.7% for the period February 2009 to June 2009 versus 24.6% a year ago. This has given program traders more control and the ability to manipulate the markets. Goldman Sachs, in particular, has substantially increased its program trading volumes. While overall market volume was and is declining, Goldman Sachs' average weekly volume has been creeping higher. For the period February 2009 to June 2009, Goldman Sachs' average weekly volumes more than doubled to 1,173 mn and formed 7.1% of total NYSE volumes, up from 556 mn, or 2.8% of NYSE total volumes a year ago.

  • 2. Even more worrying and a material cause of concern is the increase in principal trading which is gaining significant strength to the extent that it is re-defining market movements, particularly by Goldman Sachs. For the week ending June 19, 2009, principal trading by program trading firms accounted for 45.0% of the total program trading volumes and 18.2% of the total NYSE volumes compared with 32% of the total program trading volumes and 8.6% of the total NYSE volumes last year. GS's share in the total principal trading rose to 37.6% for the week ending June 19, 2009 against 21.0%, a year ago. GS's total program trading accounted for 8.3% of the total NYSE volumes with about 82% being the GS's own principal transactions. In the same week last year, GS's program trading accounted for just 2.9% of the total NYSE volumes and 62% of these were GS principal transactions.
      Feb 27, 09 -June 19, 09 Feb 29, 08 -June 20, 08 % change
y-o-y
CY 2008 % change
over 08'
Change in S&P index  

25.3%

 

 

 

 

 

 

 

 

 

 

 

 

Avg NYSE volumes (daily)

 3,304

  4,042

-18.3%

 4,318

-23.5%

 

 

 

 

 

 

 

 

Avg porgram trading volumes

 1,014

  996

1.8%

 1,037

-2.2%

PT / Total NYSE volumes

30.7%

24.6%

 

24.0%

 

 

 

 

 

 

 

 

 

GS volumes (weekly)

 

 1,173

 556

110.9%

 670

75.2%

GS / Total NYSE volumes

7.1%

2.8%

 

3.1%

 

 

 

 

 

 

 

 

 

MS volumes (weekly)

 

573

  571

0.3%

 560

2.3%

MS / Total NYSE volumes

3.5%

2.8%

 

2.6%

 
  • 3. Increased program trading seem to have dented the market's traditional price-setting mechanism, with S&P's volume weighted average price (VWAP) getting registered lower than the S&P close for most of April and May indicating that fewer and fewer high priced deals backed the market movement. This confirms my suspicions that it is a small amount of high frequency traders (primarily Goldman Sachs, et. al, but Goldman in particular) that are dominating the market's troop upwards, more so than any real volume of real buyers actually seeking to purchase stocks at higher prices.

image008.png

image007_copy.png

  • 4. We have bifurcated volumes of program trading in up-trending and down-trending markets to determine impact of trending markets on volumes of program trading.

There seem to be no significant difference in volumes during up-trending or down trending market. Since 2008, average program trading volumes in an up-trending market was 1,035 mn, or average share of 26.9% of NYSE total volumes while in a down-trending market the  program trading volumes stood at 1,009 mn, or average share of 26.6% of NYSE total volumes. NYSE volumes during up trending market was higher by 1.8% than down trending market while program trading volumes were higher by 2.6% during up trending market.

 

Up trending market   Down trending market
Week Program trading volumes NYSE Volumes Share of program trading Increase in S&P   Week Program trading volumes NYSE Volumes Share of program trading Decrease  in S&P
Average                      1,035             3,987 26.9%     Average                 1,009                   3,915 26.6%  
                     
25-Jan-08                      1,548             6,135 25.2% 0.4%   04-Jan-08                 1,099                   3,525 31.2% -4.5%
01-Feb-08                      1,294             4,782 27.1% 4.9%   11-Jan-08                 1,335                   4,777 27.9% -0.8%
15-Feb-08                         995             3,908 25.5% 1.4%   18-Jan-08                 1,304                   5,034 25.9% -5.4%
22-Feb-08                      1,004             3,951 25.4% 0.2%   08-Feb-08                 1,132                   4,274 26.5% -4.6%
21-Mar-08                      1,623             5,715 28.4% 3.2%   29-Feb-08                 1,115                   4,216 26.4% -1.7%
04-Apr-08                      1,073             4,136 25.9% 4.2%   07-Mar-08                 1,118                   4,565 24.5% -2.8%
18-Apr-08                         895             3,706 24.2% 4.3%   14-Mar-08                 1,169                   4,835 24.2% -0.4%
25-Apr-08                         827             3,747 22.1% 0.5%   28-Mar-08                    980                   4,074 24.1% -1.1%
02-May-08                         926             3,790 24.4% 1.1%   11-Apr-08                    795                   3,555 22.4% -2.7%
16-May-08                         853             3,517 24.2% 2.7%   09-May-08                    821                   3,484 23.6% -1.8%
30-May-08                      1,042             3,683 28.3% 1.8%   23-May-08                    811                   3,613 22.4% -3.5%
13-Jun-08                         853             3,937 21.7% 0.0%   06-Jun-08                    915                   4,023 22.8% -2.8%
18-Jul-08                      1,256             5,479 22.9% 1.7%   20-Jun-08                 1,121                   4,127 27.2% -3.1%
01-Aug-08                         997             4,403 22.7% 0.2%   27-Jun-08                 1,715                   4,973 34.5% -3.0%
08-Aug-08                         908             4,226 21.5% 2.9%   04-Jul-08                 1,085                   4,435 24.5% -1.2%
15-Aug-08                         898             3,924 22.9% 0.1%   11-Jul-08                 1,097                   5,119 21.4% -1.9%
12-Sep-08                         966             5,433 17.8% 0.8%   25-Jul-08                 1,046                   4,845 21.6% -0.2%
19-Sep-08                      1,545             7,752 19.9% 0.3%   22-Aug-08                    714                   3,364 21.2% -0.5%
17-Oct-08                      1,084             6,222 17.4% 4.6%   29-Aug-08                    745                   2,934 25.4% -0.7%
31-Oct-08                         925             5,212 17.7% 10.5%   05-Sep-08                    889                   4,306 20.6% -3.2%
28-Nov-08                      1,010             3,182 31.7% 12.0%   26-Sep-08                    692                   3,995 17.3% -3.4%
12-Dec-08                         980             3,100 31.6% 0.4%   03-Oct-08                    907                   5,361 16.9% -9.4%
19-Dec-08                      1,384             3,407 40.6% 0.9%   10-Oct-08                 1,177                   7,262 16.2% -18.2%
02-Jan-09                         779             2,221 35.1% 6.8%   24-Oct-08                    855                   5,228 16.4% -6.8%
06-Feb-09                         924             3,000 30.8% 5.2%   07-Nov-08                    768                   3,444 22.3% -3.9%
13-Mar-09                      1,126             3,659 30.8% 10.7%   14-Nov-08                    848                   3,051 27.8% -6.2%
20-Mar-09                      1,341             4,112 32.6% 1.6%   21-Nov-08                 1,172                   3,841 30.5% -8.4%
27-Mar-09                      1,037             3,549 29.2% 6.2%   05-Dec-08                 1,120                   3,312 33.8% -2.3%
03-Apr-09                      1,089             3,344 32.6% 3.3%   26-Dec-08                    487                   1,620 30.1% -1.7%
10-Apr-09                         920             2,978 30.9% 1.7%   09-Jan-09                    871                   2,660 32.7% -4.4%
17-Apr-09                      1,017             3,418 29.8% 1.5%   16-Jan-09                 1,014                   3,034 33.4% -4.5%
01-May-09                         878             2,979 29.5% 1.3%   23-Jan-09                 1,050                   3,305 31.8% -2.1%
08-May-09                         963             3,742 25.7% 5.9%   30-Jan-09                    868                   2,849 30.4% -0.7%
22-May-09                         761             2,877 26.5% 0.5%   13-Feb-09                    885                   2,916 30.3% -4.8%
29-May-09                      1,070             3,173 33.7% 3.6%   20-Feb-09                 1,119                   3,434 32.6% -6.9%
05-Jun-09                         821             2,901 28.3% 2.3%   27-Feb-09                 1,220                   3,728 32.7% -4.5%
12-Jun-09                         686             2,233 30.7% 0.7%   06-Mar-09                 1,270                   3,853 33.0% -7.0%
            24-Apr-09                    965                   3,511 27.5% -0.4%
            15-May-09                    927                   3,265 28.4% -5.0%
            19-Jun-09                 1,155                   2,855 40.4% -2.6%