Volume In Trading

Other than actual stock prices, trading volume is one of the most closely watched measures of stock-market health. Volume is both a number - a measure of market liquidity based on the number of shares that change hands each day - and an indicator - demonstrating just how much confidence traders have (or don't have) in a particular market trend.


Larger-than-normal volume is viewed as a sign that traders are confident in the market trend at hand. Movement on low volume is seen as an indicator of a trend that's unlikely to continue.


Unfortunately, the perception is much better than the reality. And thanks to three key factors - high-frequency trading (HFT), the proliferation of exchange-traded funds (ETFs) and active-arbitrage trading - current stock-market volume is far worse than investors even imagine.


(HFT) conducted by proprietary trading desks at big banks and private hedge funds accounted for 70% of equity trading volume.
 The massive proliferation of (ETFs) that have become so popular with retail investors is also a major cause of the misleading stock-market volume statistics. And not because they are traded by investors, but because they are traded by a handful of privileged "INSIDERS."


In addition to HFT share volume, active  increases daily volume when these insiders buy and sell the underlying securities that make up ETF portfolios against their simultaneous trading of the actual ETF shares.


How these active traders increase volume and what that means for markets is important.
Whether or not the conventional wisdom - that markets that rally on thin volume are dangerous - will be proven correct by any meaningful downturn remains to be seen.