Citi may turn out the lights on sleepy market

By Paul R. La Monica, assistant managing editor


NEW YORK (CNNMoney) -- If you think trading volume has been anemic in the past few months, you ain't seen nothing yet.

Citigroup (C, Fortune 500) has routinely been one of the most actively traded stocks on the New York Stock Exchange for awhile. Nearly 420 million shares have changed hands daily, on average, for the past three months.

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But that number could get cut by a factor of 10 come Monday. Citi is conducting a 1-for-10 reverse stock split after the closing bell Friday.

That means the number of shares outstanding will be reduced in order to boost the stock price. The value of Citi does not change though. So if you owned 100 shares at $4.48, Thursday's closing price, you'd now have 10 shares worth $44.80.

Whether this move helps boost Citi's fortunes is debatable. Many major fund managers won't touch a stock that's below $5 a share, so Citi may now pop up on their radar screens. But reverse splits are also often viewed as an act of desperation.

But one thing seems certain. Fewer shares for Citi should lead to even sleepier days in the market for the foreseeable future.

It's worth noting that other big volume stocks are ones in a similar situation to Citi: large share count and low stock price. That's like manna from heaven for active traders looking to make a quick buck on small moves. Sirius XM (SIRI) and Sprint (S, Fortune 500) are two single-digit stocks that are heavily traded.

"Without question, Citi's split will affect volume," said Ryan Detrick, senior technical strategist with Schaeffer's Investment Research in Cincinnati. "You're not going to have as many people trading the stock at $45 with a smaller share count as you do at $4.50."

Is this bad news for the markets? Yes and no. On the one hand, weak volume could be a sign of a lack of conviction. When stocks go up without a lot of trading, it may be a sucker's rally.

"I'd much rather see broader participation in the market," said Barry Ritholtz, CEO of Fusion IQ, a New York-based research firm. "What makes stocks go up and stay up is when big institutions go out and buy."

Ritholtz said he's a little worried that there isn't an influx of new money in the market. Instead, mutual funds and hedge funds are rotating from one sector or stock to the next.

But Detrick said that low volume for stocks may not be as much of a concern as it used to be. For one, low volume may be something that's confined to stocks. Investors may simply be gravitating toward other asset classes, such as commodities, currencies and options.

"Options volume is continually improving," Detrick said. "Investors are becoming more sophisticated and are finding other things to trade. That's one reason why stock volume is lighter."

That makes sense. The explosion in options trading is why TD Ameritrade (AMTD) bought thinkorswim a few years ago and why Charles Schwab (SCHW, Fortune 500) is in the process of buying optionsXpress (OXPS).

The move away from stocks is also a prime driver of the flurry of deals among the big stock exchanges. NYSE Euronext (NYX, Fortune 500) is hoping to merge with Deutsche Boerse, but Nasdaq OMX (NDAQ) and IntercontinentalExchange (ICE) are launching a counterbid for the NYSE.

Finally, Detrick points out that volume has been relatively low for the past few years. If you used low volume as an excuse to sit on the sidelines, you've missed out an opportunity to make a lot of money.

"Volume may not be important as it was even just a few years ago," he said. "You can't ignore low volume, but we've rallied for more than two years."

Reader comment of the week. And thanks, Corporate America! First, I'd like to thank all Buzz readers for putting up with the unfortunate spam in our comments section for the past year or so. CNNMoney is rolling out a new comment system on Monday that I hope will be a huge improvement. You can see it live now on our Fortune 500 snapshot pages.

As for this week's best comment, there has been a lot of chatter over on Twitter about silver's spectacular flame-out this week. But Bryan Brune said nobody should be surprised.

"Yes, silver was a bubble. Yes, bubbles pop. Learn from history or be doomed to repeat it," he tweeted.

Finally, I implored big businesses to start hiring again in Wednesday's column. I said that I wanted to see a private sector payroll gain of more than 250,000 for April. Lo and behold, we find out Friday that the private sector added 268,000 jobs. Nice work! Let's hope this is just the beginning of a hiring trend.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

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