New analysis of trading tactics during the extreme volatility that rocked European markets in August shows that buy-side firms shunned patient opportunistic trading strategies.
The paper from Credit Suisse’s Advanced Execution Services division used data from the bank’s client database to monitor the impact of volatility, including changes in the mix of trading tactics, lit versus dark market share and the performance of implementation shortfall and VWAP tactics.
In terms of opportunistic trading strategies, i.e. those that take liquidity, Credit Suisse found that compared to the previous period of sustained volatility experienced towards the end of 2008, buy-side traders significantly reduced their use of ‘patient’ strategies, i.e. those that sit passively, sometimes in dark pools only.
The use of patient strategies by Credit Suisse clients reduced by around 6.5% in August 2011 compared to a marginal increase during the volatile period in 2008.
The report notes that the lower likelihood of matching orders in the dark in a market characterised by extreme selling/buying pressure, combined with opportunity costs, may have contributed to the decline in usage of patient opportunistic strategies in August.
Since Q3 2008, dark volumes in Europe have rocketed from €1.42 billion in September 2008 to €23.96 billion in September 2011, according to figures from Thomson Reuters.
However, the turbulent markets in August led to a decline in dark market share, with dark multilateral trading facilities trading 2.29% of overall European liquidity in the first two weeks of August 2011, compared with 3.1% in the last week of July.
Aggressive strategies, which cross the spread to grab available liquidity, also declined by just under 2% in the August-September period compared with the first seven months of the year, but not as much as 2008, when levels from 6% between January-August 2008 and the last four months of the year. Credit Suisse believes the use of less aggressive strategies could be a consequence of wider bid-ask spreads, or a fear of pushing the market.
Overall value traded was €1.25 trillion in September 2008, compared to €1.148 trillion in August 2011. According to the Credit Suisse research, volatility in August led to a doubling of spreads to 8.2 basis points from 4.7 bps in July. This is compared to the start of the global financial crisis in September 2008, when spreads surged to around 16-17 bps.