Adjusted market turnover

What Is Adjusted Market Turnover?

Adjusted market turnover refers to the total value of securities traded within a given period, specifically filtered to exclude non-bona fide or manipulative transactions. This metric, central to Financial Regulation/Compliance, provides a more accurate representation of legitimate trading activity and genuine Market Liquidity within Financial Markets. Unlike raw Trading Volume or gross turnover, adjusted market turnover aims to present an uninflated view of market participation by stripping out trades designed to create a false impression of activity. The adjustment typically targets practices such as "wash sales" or other forms of Market Manipulation.

History and Origin

The concept of adjusting market turnover evolved alongside regulatory efforts to enhance market transparency and combat abusive trading practices. As electronic trading and complex Algorithmic Trading became more prevalent, so did the potential for deceptive activities that could artificially inflate trading figures without representing true economic interest. Regulatory bodies worldwide, including the Securities and Exchange Commission (SEC) in the United States and the European Securities and Markets Authority (ESMA) in Europe, recognized the need for clearer insights into genuine market activity.

A significant push for increased transparency came with regulations like the SEC's amendments to Regulation ATS in 2018, which aimed to enhance public disclosure for Alternative Trading Systems (ATSs)¹³, ¹⁴, ¹⁵. Similarly, the Markets in Financial Instruments Directive II (MiFID II) in Europe, effective from January 2018, imposed stringent pre- and post-trade transparency requirements across various asset classes, fundamentally altering how market data is reported and analyzed⁹, ¹⁰, ¹¹, ¹². These regulatory shifts underscore the importance of distinguishing legitimate trading from manipulative activity, thereby giving rise to the need for a concept like adjusted market turnover.

Key Takeaways

• Adjusted market turnover provides a more accurate measure of true trading activity by excluding non-bona fide transactions.
• It is a crucial metric for assessing genuine market liquidity and Market Integrity.
• Regulatory bodies use adjusted market turnover to monitor for manipulative trading practices.
• The concept is particularly relevant in markets where wash sales and other forms of artificial volume generation could distort gross figures.
• Analyzing adjusted market turnover helps market participants make more informed decisions by relying on data that reflects real supply and demand.

Formula and Calculation

While "adjusted market turnover" is more of a conceptual refinement than a single, universally applied formula, it can be broadly understood as:

Where:

• Gross Market Turnover represents the total value of all securities traded within a specific period, calculated by multiplying the quantity of each security traded by its respective trade price and summing these values.
• Value of Non-Bona Fide Transactions refers to the monetary value of trades identified as manipulative or without legitimate economic purpose, such as wash sales (where there is no change in beneficial ownership) or pre-arranged trades designed solely to generate artificial trading volume. Identifying and quantifying these transactions often involves sophisticated surveillance systems and regulatory definitions.

Interpreting the Adjusted Market Turnover

Interpreting adjusted market turnover involves understanding that a higher figure generally signifies a more liquid and healthy market, as it reflects genuine investor interest and efficient Price Discovery. Conversely, a significant difference between gross market turnover and adjusted market turnover could indicate the presence of manipulative activities.

Analysts and regulators examine adjusted market turnover to gauge the depth and efficiency of a market. A consistently high adjusted market turnover suggests that participants can buy and sell assets without significant impact on price, leading to lower Transaction Costs and a tighter Bid-Ask Spread. This metric provides a more reliable signal of market activity than raw turnover, especially in environments where high-frequency trading or algorithmic strategies could otherwise obscure underlying trends.

Hypothetical Example

Consider a hypothetical stock, "AlphaCorp (ACORP)," traded on a national exchange. Over a single trading day, the reported gross market turnover for ACORP is $100 million.

1. Initial Calculation (Gross Turnover): The sum of all buy and sell transactions for ACORP equals $100,000,000.
2. Regulatory Scrutiny: The exchange's surveillance system, in line with Regulatory Compliance protocols, flags certain trades.
3. Identification of Non-Bona Fide Trades: It identifies a series of cross-market trades totaling $15 million where the same broker-dealer acted for both buyer and seller, and there was no change in beneficial ownership. These are identified as wash sales.
4. Adjustment: These $15 million in wash sales are subtracted from the gross turnover.

In this example, the adjusted market turnover for ACORP is $85 million. This figure offers a more accurate picture of the real economic activity and investor interest in ACORP shares, excluding the artificially generated volume.

Practical Applications

Adjusted market turnover is a vital metric across several facets of the financial industry:

• Market Surveillance and Regulation: Regulatory bodies like the Securities and Exchange Commission (SEC) and FINRA actively use this concept in their efforts to detect and prevent Market Manipulation. By analyzing adjusted market turnover, they can identify patterns indicative of wash trading, spoofing, or layering, ensuring fair and orderly markets⁶, ⁷, ⁸. The SEC, for example, has increased scrutiny on manipulative practices, including wash trading, in various asset classes⁴, ⁵.
• Exchange Performance Measurement: Stock exchanges and Alternative Trading System (ATS) operators utilize adjusted turnover to assess the true vibrancy and efficiency of their trading venues. It helps them differentiate genuine trading interest from inflated figures, guiding decisions on market structure and fee schedules.
• Academic Research: Economists and financial researchers employ adjusted market turnover in studies of market liquidity, market efficiency, and the impact of regulatory changes. It provides a cleaner dataset for understanding fundamental market dynamics.
• Investment Analysis: While less common for individual investors, institutional traders and quantitative analysts may consider adjusted market turnover when evaluating the tradability of a security or the depth of its Order Book. A security with high gross turnover but low adjusted turnover might signal potential risks or deceptive activity. The Bank for International Settlements (BIS) provides global liquidity indicators that help understand the ease of financing in global financial markets, highlighting factors that influence real trading activity², ³.

Limitations and Criticisms

While adjusted market turnover offers a more refined view of trading activity, it is not without limitations. A primary challenge lies in the precise identification and classification of "non-bona fide" transactions. Sophisticated Algorithmic Trading strategies can sometimes blur the line between legitimate high-frequency trading and manipulative practices, making it difficult to definitively exclude all artificial volume.

Furthermore, defining what constitutes a manipulative trade can evolve with market practices and technological advancements, requiring continuous updates to regulatory frameworks and surveillance tools. There is also the potential for false positives, where legitimate trading strategies might be mistakenly flagged, leading to unnecessary scrutiny or disruptions. The effectiveness of adjusted market turnover relies heavily on the robustness of the Regulatory Compliance and surveillance systems in place, and the willingness of regulators to enforce anti-Market Manipulation rules¹.

Adjusted Market Turnover vs. Wash Sale

The distinction between adjusted market turnover and a wash sale is one of scope. A wash sale is a specific type of non-bona fide transaction where an investor simultaneously buys and sells the same security, often with the intent to create a misleading appearance of activity or to harvest a tax loss without genuinely changing their market position. It represents a single, manipulative trade or a series of such trades.

Adjusted market turnover, on the other hand, is a broader aggregated metric. It is the result of removing wash sales (and potentially other forms of non-bona fide transactions) from the total gross market turnover. Therefore, wash sales are a component that adjusted market turnover seeks to exclude, not an alternative measure of overall market activity. Adjusted market turnover provides a cleaner picture of true trading activity by subtracting these deceptive practices, whereas a wash sale is the deceptive practice itself.

FAQs

What is the primary purpose of calculating adjusted market turnover?

The primary purpose of calculating adjusted market turnover is to gain a clearer and more accurate understanding of genuine trading activity and Market Liquidity in financial markets, by excluding transactions that are not driven by true economic intent, such as manipulative trades.

How does adjusted market turnover differ from gross trading volume?

Gross Trading Volume or gross market turnover includes all transactions, regardless of their nature. Adjusted market turnover refines this by specifically subtracting or excluding non-bona fide transactions, like wash sales, which artificially inflate volume without representing real market interest or change in beneficial ownership.

Who uses adjusted market turnover?

Adjusted market turnover is primarily used by market regulators like the Securities and Exchange Commission (SEC) and FINRA for surveillance and enforcement purposes, as well as by exchanges and academic researchers to assess market health and integrity.

Why are wash sales excluded from adjusted market turnover?

Wash sales are excluded because they are considered a form of Market Manipulation. They create the false impression of active trading and demand/supply for a security without any real transfer of ownership or market risk, thus distorting the true picture of market activity and Price Discovery.

Can adjusted market turnover be a negative value?

No, adjusted market turnover cannot be a negative value. Even if the value of non-bona fide transactions were somehow to exceed gross turnover (which would imply a complete absence of legitimate trading), the adjusted turnover would be zero, indicating no true market activity. In practice, it will always be zero or a positive value representing genuine trading.