Insights and Market Perspectives

Why trading volumes are full of noise

Author: John Christofilos

March 6, 2018

Download the article

Average daily volume – noise = liquidity.

This isn’t an equation you’ll read in a stock buyer’s manual or finance textbook, but it’s one that traders are being forced to solve for regularly in today’s market environment.

A good deal of volume now trades from one high frequency trader (HFT) to another and moves too fast for other market participants to engage in. This “noise” has very little to do with a stock’s true liquidity which is best defined as those shares trading hands between investors prepared to buy stock for the purposes of holding it, not selling it right away.

For example, a stock’s average daily volume could be 200,000 shares a day, but the accurate representation of its liquidity may be closer to 100,000 shares a day once HFT activity is accounted for. This is an important differential for all investors to understand because overestimating the true liquidity of a stock may lead to a more difficult transaction and potentially higher costs. Larger trades, in particular, may need to be filled with multiple orders at escalating prices instead of being filled in one go at the price originally anticipated.

Separating the noise from the total trade volume of a stock isn’t a perfect science, however. Generally speaking, HFT activity will have more of an impact on the trade volumes of small cap stocks that are less liquid, than it will on larger, more liquid stocks. Average daily volume also tends to be a truer reflection of liquidity in periods of heightened volatility because high frequency traders tend to back away from markets in more turbulent times.

An experienced trader, meanwhile, may be able to identify some of the noise by learning which broker/dealers have HFTs on their platform and then tracking trades originating from them. This is made easier in Canada, where each broker/dealer has its own unique registration number, but often comes down to a trader’s ability to read the particular signs of high frequency trading (i.e. moving bid/ask spreads) that he/she has learned to recognize over time.

While quantifying the exact amount of noise in a stock’s trading volume can be difficult, knowing that it exists can better shape your liquidity assumptions and make future trades go more smoothly.

John Christofilos is a senior vice president and chief trading officer at AGF Investment Inc. He is a regular contributor to AGF Perspectives.

Commentaries contained herein are provided as a general source of information based on information available as of March 5, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit

© 2018 AGF Management Limited. All rights reserved.

Written by

John Christofilos

Senior Vice President & Head Trader

AGF Investments Inc.

More articles like this.

The alphabet of Chinese equities

Here’s a breakdown of some of the key Chinese stock categorizations.

Read More

3 reasons to consider convertible bonds

A well-rounded fixed income portfolio may help mitigate the risk of potentially higher rates.

Read More

3 takeaways from year one on the job

AGF’s lead portfolio manager for emerging market equity strategies discusses some of the important decisions made during her first year on the job.

Read More