The extreme volatility that has recently rattled global markets has led to some buy-side traders abandoning algorithms altogether through fear of being gamed by high-frequency trading (HFT) firms.
Trading turnover rocketed last week, with a year-high €83.4 billion worth of European equities traded on 5 August and €68.15 billion traded on 8 August, according to Thomson Reuters. The swell continued this week, with €81.2 billion traded on Tuesday 9 August.
Volatility was also high with the VSTOXX, an index that measures volatility based on fluctuations in the price of EURO STOXX 50 options, reaching 40 on 5 August before rising further by 9.8% to 45 on 8 August.
These conditions led some fund managers to drastically reduce their reliance on electronic trading tools.
“We haven't touched an algorithm in over a week,” commented Adrian Fitzpatrick, head of investment dealing at Aegon Asset Management. “In our opinion, using algorithms during these conditions increases the risk of being picked off by high-frequency traders and may not offer you the liquidity you need.”
Fitzpatrick added that many of his orders were handled by the risk desks of brokers, with some orders being sent to block-focused dark pools such as Liquidnet or ITG POSIT.
Other buy-side heads said they tried to continue using algorithms where they could, but judged each situation depending on market conditions at the time.
Those traders that did use algorithms tended to favour active trading strategies such as liquidity-seeking or direct market access, notes Bradley Duke, managing director, Europe at Knight Direct, the electronic trading business of agency broker Knight Capital.
“We saw many clients shy away from those trading strategies that try to chase benchmarks, such as VWAP or participation-based algorithms, because of the price uncertainty caused by the volatility,” said Duke. “We saw clients make more use of our active liquidity sourcing algorithms such as Sumo or FAN.”
During this year, trading volumes have only reached similar highs on one occasion, with €82.78 billion traded on 15 March, following the earthquake and tsunami that devastated Japan the previous week. On 19 September 2008, days after the collapse of US investment bank Lehman Brothers, European trading volumes surged to €120.78 billion.
MTF gains
The volatility and inflated trading volumes benefitted pan-European multilateral trading facilities (MTFs). Chi-X Europe was the largest trading venue for the majority of last week, ahead of the London Stock Exchange Group, which operates UK and Italian markets as well as its own MTF Turquoise, and NYSE Euronext, which owns domestic markets in France, Belgium, Holland and Portugal.
On 5 August, Chi-X traded a record €17.5 billion worth of equities, representing 20.9% pan-European market share, including a 32.9% share of FTSE 100 stocks and 30.22% of Dutch blue chip stocks, according to the MTF's own figures. By comparison, the LSE had a 48.13% share of FTSE 100 trading on 5 August, while Turquoise grabbed 9.26% of FTSE 100 trading on the same day. Turquoise also traded a daily record of €5.5 billion on 5 August, representing 6.15% pan-European market share.
The strong volumes on Chi-X Europe continued into this week, with the MTF trading €15.9 billion on Tuesday and reaching a record 33.1% share of FTSE 100 stocks on Monday 8 August.
According to Chi-X Europe CEO Alasdair Haynes, the market share records are part of a growth trend that the MTF has been experiencing for some months.
“Our market share has been consistently growing prior to the events of last week,” said Haynes. “We continue to prove that we are a true secondary trading market and pull away from the other MTFs.”
Haynes also said that proprietary trading firms – many of which operate HFT strategies – had increased their participation on Chi-X Europe during the last week, but added that such firms now represented a lower proportion of the trading venue's membership base.
“Historically, in volatile market conditions proprietary trading businesses – which are generally more active when markets are volatile – have driven Chi-X Europe’s volume gains,” he said. “We had support from a number of HFT businesses when we first set up, but today our top 20 customers are the same as those of the largest domestic European exchanges.”
During the last period of market uncertainty, the downgrade of Greek sovereign debt on 13 June, Chi-X Europe traded €2.66 billion of FTSE 100 stocks, representing a 20.6% market share. This was down from €6.11 billion worth of FTSE 100 stocks, or 26.4% market share, the previous day. Unlike current market conditions, trading volumes were lower generally on 13 June, with €19.68 billion traded in Europe, compared to €35.7 billion the previous day.