Severe but short trading drop on horizon

By Jonathan Spicer

NEW YORK (Reuters) - After a panicked few months of record selling, the world's stock traders are walking away from equity markets and are not expected to return in force until 2010.

Fewer participants signals a drought for companies that rely on trading volumes, such as online brokerages and exchange operators, both of which have benefited from a spike in volume brought on by the volatile selloff.

Because the selloff was so sharp, market observers expect the decline in trading volume to be severe but short -- unlike early this decade, when U.S. equity trading volume took three years to follow the broader market down.

"What you're seeing is an extraordinary phenomenon where liquidity just blew out to unprecedented levels," said Laurie Berke, senior consultant at research and advisory firm TABB Group and author of its soon-to-be-published U.S. Institutional Equity Trading study.

"The liquidation has been far greater, equity assets under management have shrunk far more rapidly, so therefore I think the impact on volume happens much faster, and it's in 2009," she said in an interview. "You don't wait until 2010 for that to happen."

It took nearly three years for the dot-com crisis to decimate stocks the way the credit crisis has in less than a year.

While the S&P 500 index .SPX skidded from 2000 to 2002, average daily volume continued to rise. It wasn't until 2003, when the S&P rebounded 26 percent, that volume finally declined, by 3 percent.

"We could have a lower volume period throughout much of 2009, until the market begins to see the light at the end of the tunnel," Berke said.  Continued...