In this world of high-frequency trading, how long do you think the average share is held?
As we are continually reminded, we live in a world of casino capitalism and high-frequency algorithmic trading, where shares are shuffled between super-fast computers in milliseconds. So what would you say is the average holding time of a share? Take a rough guess.
A friend of mine posed this question to me recently, before telling me that shares are now held for an average of just 22 seconds, up from 20 seconds a year previously.
I was surprised, but not very; then I decided to drill into this a little more deeply.
Some real numbers
Looking up some statistics for the London market, I found that the total value of shares traded on the Main Market and AIM combined in 2011 was £1,181 billion, while the total market capitalisation -- the value of all shares -- at the end of the year was £1,886 billion.
This implies that shares are turned over on average once every 19 months or so. Hmm.
So where did the 22 seconds come from?
The 22-second factoid has been widely quoted in the press and on anti-capitalist blogs, often citing as the source an article in the Telegraph:
"Investors are advised to invest for the long-term, yet in the US the average share holding lasts just 22 seconds … Michael Hudson, a former Wall Street economist at Chase Manhattan Bank who also helped establish the world's first sovereign debt fund recently said: 'Take any stock in the United States. The average time in which you hold a stock is -- it's gone up from 20 seconds to 22 seconds in the last year.'"
Okay, so this relates to the US market. I'm sure the NYSE publishes definitive information on turnover and total capitalisation on the New York market, but if they do, it's well hidden. Performing the same calculation with some unverifiable data from the internet gives a holding period of about 8.4 months for the US.
Intrigued, I contacted the original source quoted in the Telegraph article, professor Michael Hudson, who is an author, Wall Street financial analyst and distinguished research professor of economics at the University of Missouri, Kansas City. He clarified that he had been referring to the average time for which stocks traded during the day had been held.
This is certainly not the way the information had been presented in any reports I read. Had the professor been misquoted? Some more sleuthing led to the original video interview in which he made the claim, and anyone watching could only conclude as the Telegraph has done, that shares are held for an average of 22 seconds; in the heat of the interview, there was no attempt to clarify what was meant.
So what's the difference?
The truth is that we cannot just look at the shares actually traded in a particular period, see how long they were held by the previous owner and conclude that this is the average holding period for shares. All the shares that were not traded, such as those held by buy-and-hold investors, are simply not considered in this calculation.
We would not, for example, estimate the average alcohol consumption in the country by going to a pub, noting the amount consumed and applying this to the whole population. It would be absurd.
And this matters, because so many people now believe the 22-second factoid, and I would not be surprised if some lawmakers and regulators also had it somewhere in their minds when formulating policy. But, as Mark Twain said, "a lie [or in this case, false information] can travel halfway around the world while the truth is still putting on its shoes".
For what it's worth, my guess in answer to the original question was a holding period of a few weeks, so I was very far from the right answer.
"My favourite time frame for holding a stock is forever" -- Warren Buffett.
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