Virtu Financial study reveals surge in trading costs globally during March

While spreads globally have fallen from highs seen in March, they are still higher than earlier in the year as markets remain uncertain and volatile.  

Trading costs globally have surged following increased market volatility during the coronavirus pandemic, and despite declining recently they remain higher than before the crisis, according to data from Virtu Financial.

A study from the brokerage and analytics division at Virtu Financial, seen by The TRADE, has revealed that following a spike in volatility and wider spreads in March, trading costs as captured by its ‘Global Peer Universe’ spiked significantly, with every region seeing a large increase in the first quarter this year.

US trading costs surged 42% in the first quarter compared to the quarter prior, with March costs increasing to a high of -63.7 bps. At the same time, trading costs in the UK surged 76% during the period,  55.2% in Europe – excluding the UK, and 78% in Asia Pacific – excluding Japan. 

Spreads for the S&P 500 have since decreased significantly from the highs in March, with market impact costs for a 500mm portfolio in the index starting to drop after hitting 14.4 bps on 9 April, down from 19.95 bps in late March. Virtu added that a 500mm portfolio in the UK’s FTSE 100 remains the most expensive.

While spreads globally have fallen from the highs seen in March, Virtu Financial said they remain elevated compared to January due to the ongoing sense of uncertainty and volatility in equities and currency markets, that will most likely continue.

Virtu’s Global Peer database uses proprietary transaction data from asset managers encompassing more than 20% of all institutional equity trades globally. The firm has seen increased demand from clients to produce market impact models in light of the recent volatility. Virtu provides quarterly ‘Global Cost Review’ reports for clients to analyse execution costs. 

“More and more clients have incorporated market impact models into their trading process directly so it’s critical that their models adjust dynamically,” Virtu said. “We’ve been writing several mini pieces to answer these client questions which clients are in turn using to adjust trading strategies, communicate to senior management internally around prevailing market conditions and to manage portfolio managers expectations around trading cost outcomes.”