How Much Trading is “High Frequency?”

After Knight Capital’s meltdown, inquiring minds have asked how much of today’s stock market volume consists of computers trading with each other versus actual investors trading stocks they intend to hold longer than a few microseconds.

The following chart plots the average daily volume of S&P 500 shares traded since 1950.

Trading didn’t begin to ramp up until the beginning of the dot.com bubble in 1995-96, a phenomenon accompanied by the day-trading craze of the late 1990s.

The bust that followed slowed trading somewhat, but growth in the average number of shares traded accelerated in 2005 and reached a peak in 2009.

For daily fluctuations, see the following chart (source Yahoo Finance), which plots individual day volume along with the 20 day moving average.

Even after the dot.com implosion, volumes rarely reached 2 million/day until 2005.  However, trading volumes have declined by 31% since their 2009 peak.

Retail investors appear to be abandoning the stock market at a rapid pace (chart from Ritholtz.com).

If the retail investor leaves, who remains?

The machines.

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One Response to “How Much Trading is “High Frequency?””

  1. Philip Says:

    The people who support HFT all say that HFT provides liquidity to the market but in my opinion all they do is scare away real traders and investors. It is not liquidity when they jump in and out if matters of seconds. Besides that 2 incidents at least last 2 years. That is 2 too many. What about the innocent traders who lost money during the flash crash?

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