As the equities market has increasingly had to adapt to periods of turbulence in recent times, panellists at the Equities Leaders Summit in Miami this week discussed the best ways to optimise and manage liquidity during volatility.
Following on from recent market-moving events seen over the last few weeks and months – most notably the ongoing Greenland negotiations being driven by the US – conversations turned to the key questions faced by institutions during volatility: when to trade, how to trade and where to trade.
Reflecting on this, Rob Bowles, distribution and liquidity management at XTX Markets indicated that market makers see increased business during volatile times, as tighter spreads are balanced with rising demand from liquidity during stress.
“The way you could characterise it is you’ve got buy-side sources of flow, you’ve got market makers who are the shock absorbers and then you’ve got the brokers who are executing the algorithms based on the underlying objective of their particular client.
“In times of volatility and extreme stress, there tends to be an increased urgency to trade, and you then see less netting opportunities. As a result, there’s an increased premium or interest in interacting with flow that can access the shock absorber.”
The impact on trading behaviour
Similar sentiment was also echoed by Noel Reyes, head of electronic trading product at Goldman Sachs, who made reference to the nature of trading patterns displayed during highly volatile periods.
Specifically, Reyes highlighted the common tendency for traders to lean into more aggressive trading strategies, which has in turn driven volumes on-exchange, rather than off-exchange.
“When you’re trading more aggressively, typically what happens is we see more trading on-exchange versus off-exchange,” he added.
“That’s because there’s a premium in the display quota. Additionally, ATS numbers go down a little bit, but what’s even more interesting is that there’s a redistribution in the market share. For different venues with more passive mechanisms like trajectory crossing, we typically see lower market share on days of high volatility.”
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In a similar vein, and perhaps further indicating the preference for on-exchange trading tactics, the rising fragmentation and volatility of modern markets have also intensified the significance of the closing auction.
To explain this increase, panellists emphasised two key drivers which have bolstered the closing auction during these periods – custom indexes and passive flows not aligned to regular schedules.
An example reference was made to efforts by the New York Stock Exchange (NYSE) to introduce balance information changes to improve usability and flexibility while maintaining fair and transparent rules.
Commenting on this, Kevin Tyrell, head of markets at NYSE, stated: “If anything, we’ve seen a growth in the closing auction volume during volatile times. When we think about the close, our obvious first point is how do I disable the market fragmentation and what can we offer to customise equipment, so that we can make sure that close works well for market participants.”
Erring on the side of caution
Although market turbulence has opened windows of opportunity for areas such as on-exchange growth and closing auction volumes, panellists were also quick to advise cautionary measures when it comes to using intermediated private rooms during these periods.
While recognising the benefits that can be wrought from this method of liquidity access – such as providing transparent interaction and adding high-quality incremental business – there are key factors to consider in tandem.
Specifically, speakers made reference to the potential for private rooms to obscure accountability, and hence complicate trade ethics. In addition, oversight in times of turbulence was also highlighted during the discussion.
Reyes, in particular, stressed this as a key element of liquidity seeking during volatile periods to stay aware of: “When a client asks my opinion about engaging in a bilateral relationship, its great if you see value add and you should connect directly to the liquidity provider who’s adding that value.
“However, a bilateral relationship has many responsibilities and that includes a fiduciary’s execution responsibility, and it all gets really murky when you insert this private room in the middle of that.”
Looking ahead, as volatility becomes a more persistent feature across the industry, market participants will have to navigate their execution and trading strategies with precision, to ensure reliable liquidity access, and successfully ride the waves of turbulence.