View from City Road: Lack of demand speaks volumes

THERE have only been three days in the past two months when the volume of shares traded on the stock market exceeded 500 million. Yesterday was better than most, with volume at more than 400 million.

But even these figures overstate the number of shares that change hands, thanks to double counting - volume figures include both buying and selling.

This is terrible news for the City. While it is difficult to be precise, daily volume probably has to reach 500 million for the stockbroking industry as a whole to break even. On this basis it has lost a great deal of money over the past months and as a result the number of job losses is bound to rise.

The fund management industry is also at risk, with low values rather than volumes the problem.

Following the market's fall fund managers, who charge a percentage of funds under management, face a reduction in revenues this year.

Low volumes have a more general significance because they make it more difficult to assess the depth of current gloom about share prices. Prices could easily jump either way.

This is because of the way the market- making system works. It relies on market- makers' judgement, reflected in the prices they quote on the screen, rather than on demand - orders from clients - and is most effective when volumes are high.

Just as a single deal in a rarely traded stock can result in a large price change, a few deals in a dull market can prompt a big adjustment in prices generally.

If a few buyers of the market as a whole were to emerge in the next few days prices might leap up. But the contrary is also true.