Financial Times | April 24, 2012
By Telis Demos in New York

NEW YORK -- Trading by "real" investors is taking up the smallest share of US stock market volumes in more than a decade, according to a recent study.

The findings highlight how US trading activity is increasingly being fuelled by fast turnover of shares by independent firms and the market-making desks of brokerages, many using high-frequency trading engines.

Though many argue that such trading lowers costs by narrowing spreads, critics insist that it makes it more difficult for institutional investors to trade larger positions, in turn fuelling a rise in the use of off-exchange "dark pools" and more complex algorithmic trading techniques.

The proportion of US trading activity represented by buy and sell orders from mutual funds, hedge funds, pensions, and brokerages, referred to as "real money" or institutional investors, accounted for just 16 per cent of total market volume in the form of buying, and 13 per cent via selling in the final quarter of last year, according to analysis by Morgan Stanley's Quantitative and Derivative Strategies group. 

That has fallen from an average of 27 per cent for institutional buys from 2001 to 2006, and 20 per cent for sells over the same period. The highs were at the beginning of 2001, as far back as Morgan Stanley's analysis goes, when buys and sells were some 35 per cent and 25 per cent, respectively. 

Morgan Stanley's analysts, Charles Crow and Simon Emrich, used 13-F filings, which are public disclosures of position changes by institutions, to measure the proportions.

The analysts said that the data may be clouded by more rapid turnover by institutions, as a result of high market volatility, which does not necessarily show up in data reported at the end of the quarter. 

"Matching of 'real' buyers and sellers is more challenging in a market where there are fewer of them," they wrote.

Though overall US trading volumes have risen since 2004, when average daily volumes were some 4 million trades, they have fallen in the past two years from their peak of 12 million at the end of 2009 to about 6 million. The share of stock trading taking place away from US exchanges also hit record levels in the first quarter of this year, at 34 per cent.