From an investor’s standpoint, it is hard to complain about the performance of the market in 2012. But despite the incredible decline in volatility since September 2011, correlations remain relatively high, particularly compared to the kind of relationship the VIX and ICX experienced prior to 2008. TABB Group believes that, until the market exhibits less correlation, we will not see a tremendous increase in active institutional equity trading activity.

In June 2012, the equity futures market surpassed the cash equity market. At the time, TABB Group speculated that if the trend were to continue, it would be a bad sign for the equities brokerage business, as it is another indicator of passive investing. However, equity futures volume market share has steadily declined since then.

Meanwhile, we expect that portfolio managers will take bigger bets on fewer names. Activity around Herbalife and Dell are good examples of the kind of trading opportunities we expect to see this year.

[Related: "The Pyramid Scheme of Volume"]

Another impact on volumes is the outcome of the continuing investigation of insider trading. If any marquee hedge fund managers were to be indicted, volumes would suffer. But while we expect there will be some hefty fines levied, we don’t anticipate any arrests. News and regulatory battlegrounds will dominate hedge fund performance and the nature of the hedge fund business.

Investors are still on the sidelines, but client balances at the major discount brokerage firms have been steadily ticking up along with strong market performance. One of our likely scenarios is that investors begin to put money back into the market, quantitative easing itself begins to ease, interest rates move up, and stock market correlations unwind. The combination of all of these factors would result in a near-term increase in transactional volumes without the long-term negativity of a bear market. Our fingers are crossed along with yours.  

The full TABB Group report, “US Equities Market: 2013 State of the Industry,” brings together our most requested data points in one concise report. It includes US equity institutional revenue cut three ways (Total, Execution Only and Low-Touch), market participant volumes, execution venue market share, high-frequency trading revenue, mutual fund flows, leveraged US equity volumes and more.