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Say stock ABC trades 100,000 shares per day. I feel strongly that in the near future it will trade 200,000 shares per day.

Is there an instrument I can buy to profit on this?

To be clear, I don't care if the stock goes up or down. I want to make money if it trades at a higher volume and lose money when it trades at a lower volume.

Essentially, if there is such a thing as liquidity insurance for a security, I want to short it.

Possible?

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You can trade on volatility if there's an options market for the stock. Maybe that's what you're trying to accomplish? –  Joel Spolsky Dec 2 '10 at 3:41
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Eh - I understand now that my original question was foolish, because obviously anyone with money could manipulate the volume. I wanted to profit on a non-volatile security with a lot of liquidity. –  John Shedletsky Dec 2 '10 at 23:02
    
And what's the bet? Volatility goes up/down: easiest is a volatility index tracker, otherwise you can look for options with mispriced volatility. The security goes up/down: long straddle. The security prices stays the same: short straddle. –  hroptatyr Nov 5 '12 at 6:13
    
@JohnShedletsky stocks like Bank of America that trade in the hundreds of millions a day can be profited off of using Direct Access Trading. "Liquidity rebates: Traditional online brokerages usually have a simple and flat commission fee per trade because they sell order flows. Direct-access brokerages do not sell order flows and get rebates. They earn money from serving their customers. An active trader can gain what traditional online brokerages gain." In other words, you get a rebate for every share of liquidity you provide. Downside is your talking about serious capital to do it! –  Matt Phillips Nov 6 '12 at 2:49
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5 Answers

up vote 10 down vote accepted

I've never heard of such a thing, but seems like if such a product existed it would be easily manipulated by the big trading firms - simply bet that trading volume will go up, then furiously buy and sell shares yourself to artificially drive up the volume.

The fact that it would be so easily manipulated makes me think that no such product exists, but I could be wrong.

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Excellent point, I should have thought of that. This is probably the answer. –  John Shedletsky Dec 1 '10 at 19:09
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What you are looking for is : Volatility http://en.wikipedia.org/wiki/Volatility_(finance)

Normally you can't trade that directly per product, but a product like the VIX as a whole.

Another option (sorry for the pun) is that certain option greeks deal with Volatility (vega I think?). There are ways to value options to buy/sell against that options/products volatility - but has some other side affects besides just pure trading of the Volatility. You'll probably need a lot of Math and use of http://en.wikipedia.org/wiki/Black-Scholes to fully understand/trade on it though.

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Not directly an answer to your question, but somewhat related: There are derivatives (whose English name I sadly don't know) that allow to profit from breaking through an upper or alternatively a lower barrier. If the trade range does not hit either barrier you lose.

This kind of derivative is useful if you expect a strong movement in either direction, which typically occurs at high volume.

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You are looking for arbitrage, not in real terms, and you may lose heavily. Big banks would suck out all profit before you get a chance to react. There are thousands of algorithmic trading systems in banks, which specifically predict such situations and try to make money from such moves. If you can invest in such a system, probably you can make a killing, else best is to forget about it. Remember that somebody before you has surely thought about it and put a system in place, so that somebody else cannot make money out of it before he/she does.

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Could you expand a bit on how that would work? I'm not sure calling it 'arbitrage' has made it clear how it works. As I understand it, arbitrage is taking advantage of price differences on different markets. As you point out, finance has been so automated that computers detect these differences very fast and perform the necessary transactions, thus restoring the 'equilibrium', leading to a 'no arbitrage' situation. But that doesn't tell how one would speculate on trading volumes. –  Raskolnikov Dec 1 '10 at 13:49
    
Yeah I wasn't thinking specifically in terms of arbitrage; and my original intent was not arbitrage. –  John Shedletsky Dec 1 '10 at 19:08
    
@Raskolnikov - I mentioned arbitrage, but said no per se but sort of as the condition doesn't fully qualify as arbitrage. Algorithmic trading also takes into consideration how the market is moving alongwith how stocks are moving. It can check for trading volumes also, for stocks where the volumes are high and then try to profit from it(short selling/selling). But if the momentum is too heavy the exchange would anyways stop trading on that specific stock. The possibilities of using algorithms are enormous. –  DumbCoder Dec 8 '10 at 15:54
    
The answer doesn't seem at all relevant to the question, even after your followup explanation in the comments. –  Ganesh Sittampalam Oct 27 '12 at 21:40
    
Comments have been deleted. Please remember that Civility is Required at all times. –  C. Ross Oct 30 '12 at 13:41
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You can use trade volume for divergence and convergence studies

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