The Myth Of The Over-Traded Market

Published in Investing on 9 March 2012

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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Comments

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dpedley 09 Mar 2012 , 12:49pm

Excuse me for still being a little in the dark...

'the average time for which stocks traded during the day had been held' ... means what exactly?

The average time for a stock to be held when it is both bought and sold in the same trading (day) session? i.e. the average time for a day trade?

timeandpatience 09 Mar 2012 , 12:53pm

Had also had my doubts about the veracity of statistics that all shares are flipped so quickly by some omnipotent computer mega-trader.....

Neil Woodford's professed average holding period for a stock is six years (see his interviews from 2010 and 2011 on the Sipp talk aj bell website).

Esquilax100 09 Mar 2012 , 2:11pm

@dpedley: Prof Hudson's measure looks at all shares changing hands, and notes how long they had been held by the previous owner.

A tiny number of shares are shuffled around between computers, but the vast majority of shares are not traded for long periods, and these are not represented in this statistic (which only looks at shares actually traded).

- Padraig

innocentatlarge 09 Mar 2012 , 4:23pm

Anything that an American finance academic says must be taken with a huge pinch of salt.

salmo365 09 Mar 2012 , 4:30pm

20 seconds would be mental.

That would mean apple alone would be trading

1,300,000,000,000 shares a day when in reality its
0,000,020,000,000 a day

giveaholic 09 Mar 2012 , 7:40pm

I wonder if some wonk could produce a "22 second" portfolio which captures the best 22 second performances of various shares?
Or perhaps just define the best 22 seconds the market fas ever seen? Worst 22?
Let's go to town on 22!

potato1066 10 Mar 2012 , 12:32am

selection bias

adjames 11 Mar 2012 , 5:39pm

Another example of statistics being misrepresented and then treated as facts in a different context.

It looks like there isn't any definitive answer as with the example of the pub being used to calculate average consumption.

Esquilax100 11 Mar 2012 , 9:18pm

@adjames: I'd argue that 19 months (ish) is the definitive answer, as the value of the shares on the market is about 1.6 years worth of trading (=1886/1181, as in the article).

- Padraig (author)

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