What is the Speculation Index

The speculation index is the ratio of trading volume on the American Stock Exchange, now known as the NYSE American, to that of the New York Stock Exchange. A high index may signal increased speculation among traders since the American Exchange lists smaller, riskier stocks.

BREAKING DOWN Speculation Index

The speculation index is an analytic measure of overall speculative trading activity in U.S. equities markets. Speculation is trading activity in which a high risk of loss is offset by the promise of large low-probability gains. Such activity takes place across all markets from real estate to foreign currency exchanges. The line between speculation and longer-term investment has become less clear in recent years due to practices like high-frequency trading (HFT) and the co-mingling of once-distinct sectors across exchanges.

Historically, the speculation index was calculated by dividing total trading volume on the American Stock Exchange (AMEX), now known as the NYSE American equities exchange, by the same volume on the New York Stock Exchange (NYSE). Many analysts believe that a high speculation index is a sign of overall bullishness among investors. An unusually high speculation index can suggest the end of an upward trend and an impending decline in market performance. The speculation index is of particular use to traders looking for predictive indicators of stock activity. As such, the speculation index is known as one of a small number of leading indicators of market activity.

The Speculation Index and the Evolution of the NYSE American Exchange

Historically, stocks listed on the AMEX have tended to be smaller companies posing greater risk to traders than the larger and more established equities traded on the NYSE. The AMEX was once the second largest exchange in the U.S, but was displaced by the growth of NASDAQ toward the end of the 20th century. The AMEX was purchased by the NYSE in 2008 and underwent two name changes, eventually emerging as the NYSE American exchange in 2009. The exchange is now completely electronic, eliminating floor trading in favor of electronic market makers. NYSE American owned less than 1 percent of U.S. market share in the first half of 2018.

In 2017 NYSE American implemented a speed bump meant to counteract the advantages enjoyed by electronic HFT firms over traditional investors. The rise of HFT activity has made interpretations of the speculation index problematic as that form of trading focused closely on extremely short-term price movements rather than longer-term market sentiments.