Although the depths of the financial crisis led to a frenzy of share trading activity in Q4 2008, equity traders woke up to a different world in 2009. Lower volumes and values combined to create treacherous trading conditions in which the optimum execution strategy was rarely certain.
According to figures from Thomson Reuters, the total turnover of European electronic equity trading, excluding over-the-counter transactions, plummeted to €7.5 billion in 2009, from just over €11.7 billion in 2008, with volumes dropping to 1.14 trillion in 2009 compared to 1.15 trillion in 2008. Although US share trading volume actually rose to 2.45 trillion in 2009 from 2.22 trillion in 2008, values tumbled to $55.5 billion from $75.6 billion, according to figures from NYSE Euronext.
In Europe, the decline in equity market volumes and values can be attributed to three factors working in tandem: institutional investors de-risking and opting for the safety of bonds; the fall of company valuations; and a drop in currency values, particularly sterling.
But it wasn’t all one-way traffic. This initial trend started to reverse in spring last year as institutional investors started to put their cash back to work. According to research by Credit Suisse’s Advanced Execution Services division, a temporary 6-7 week spike in Europe signalled the start of the reinvestment process. In addition, the last four or five months of 2009 witnessed more sustained trading, where investors were actively trying to capture alpha, rather than placing bets and holding.
The US tells a slightly different story. Although US companies suffered from a similar decline in valuations and the flight from equities, the prevalence of high-frequency trading, estimated to account for around two-thirds of US equity volumes, drove volumes higher at the beginning of the year.
“Many high-frequency traders are happiest when intraday volatility is high,” said Chris Marsh, head of Advanced Execution Services, trading and product development, Europe, Credit Suisse. “In the second half of the year, when volatility returned to more stable levels, high-frequency trading reduced in accordance with this.”
Many buy-side traders countered uncertainty and absence of liquidity with technology.
The 2009 annual benchmark study of US institutional equity trading from consultancy firm TABB Group noted that the use of algorithms increased to 31% in 2009, from 24% in 2008. Report author Laurie Berke identified the need to effectively manage unpredictable markets and fluctuating volumes as a probable cause.
Some observers have suggested that the continued fragmentation of liquidity away from primary exchanges during 2009 deepened the problems of trading in a low-volume environment, particularly in post-MiFID Europe. Maybe so. But, Rhodri Preece, director, capital markets policy, CFA Institute and author of research paper ‘Market Microstructure: The Impact of Fragmentation under the Markets in Financial Instruments Directive’, observes that the level of trading activity would not have necessarily accelerated the shift towards alternative trading venues.
“The study indicated a big spike in volatility and bid-ask spreads following the Lehman Brothers collapse,” says Preece. “When transaction volumes and notional values are lower, volatility may increase and fragmentation can accentuate this, but there is no evidence that fragmentation and falling trading volumes are linked.” Furthermore, Preece argues that the level of fragmentation is likely to be higher in a high-volume environment on account of the greater level of confidence among market participants.
Credit Suisse’s Marsh also points out that brokers’ smart order routing tools are helping the buy-side trader to identify liquidity across multiple venues, thereby offsetting any additional challenges that fragmentation may pose in a low-liquidity environment. Nevertheless, a prolonged slough in equity volume and values could force today’s electronic trading tools to break new ground in 2010.
To vote in the poll on 2010 trading volumes, click here