Since the beginning of July, the most prominent feature of the market has been the divergence in volume between financials and "all other" stocks. While overall stock market volume has been flat if not down over the past two months, and a continuation of a long-term downward trend since the March ramp up, the volume in financial stocks has staged an unprecedented pick up.
First, note the volume drift of the SPY since March, the best proxy of overall volume participation via key money managers:
As the chart below demonstrates, five primary names have been responsible for the bulk of the volume in not just financials but across the entire market. The five stocks are Citi, AIG, CIT, Fannie Mae and Freddie Mac.
A summation of the individual volumes since March reveals an unprecedented dominance of the total market volume represented by just these five stocks, hitting nearly 2 billion shares on Friday, August 21.
As a reminder, roughly 6 billion shares trade on average on the NYSE daily, and 10 billion in the domestic markets combined. This means that on Friday, 5 stocks accounted for nearly roughly 30% of the entire NYSE volume, while a stock like AIG traded its entire float in a narrow price range.
The fact that more than the entire float of AIG has traded daily on several occasions, should be a bright red light for the regulators to analyze whether this abnormal activity is due to i) massive forced recalls of stock, forcing indiscriminate short covering, of if ii) a stock trading algorithm has essentially taken over all the trading in financial stocks, and is churning volume for the pure reason of consistently painting the tape, or collecting rebates, while the overall market drifts higher on low volume. Furthermore, if the SEC considers 5 stocks accounting 30% of all NYSE volume as a normal phenomenon, one wonders just what would cause their computerized alerts to actually go off. Well, aside from a market crash, of course, which would prompt the uptick rule to be implemented within minutes of any sudden price drop, as well as the prohibition of shorting of all financial stocks, at least if one tries to determine their pro-cyclical response MO based on empirical evidence.