Lynn Strongin Dodds
Despite plummeting and volatile stock prices, the structure of the market and liquidity formation remained steady through March as the COVID-19 crisis continued to unravel, according to the latest Liquidnet Liquidity report card.
The report notes that ongoing regulatory concerns over the impact of dark trading continue to appear unfounded. Lit trading activity increased sharply in March as traders looked for certainty of execution. In addition, the percentage traded in auctions dropped sharply highlighting an increase in continuous lit trading. This can most likely be attributed to a rise in algorithm trading to combat the recent uncertainty such as trading Volume Weighted Average Price (VWAP) over the day.
Overall dark volumes peaked at over 10% of market activity in January this year while dark trading as a percentage of overall activity slipped back to between 8-9% with minimal change week on week from 8.6% to 8.7% despite the recent jump in volumes, according to the report.
The research also revealed that the decline in risk appetite was further reflected in the proportion of dark trading which is Large in Scale. While LIS peaked at 40% of overall volumes in 2019, this has subsequently slid to 30%. This is mainly because portfolio managers were opting to work orders in current market conditions rather than trading blocks. The report showed that the average market LIS execution size currently stands at €807,764 versus an average LIS execution size in Liquidnet of €1,271,896.
As for the spike in systematic internaliser activity on March 20th – daily principal traded jumped to €38bn – it was short lived and activity reverted to an almost identical pattern during the last week of March to the liquidity formation seen in February. It fell to a daily average of €13bn with an average order size of €24,000.
The increase in March was attributed to ‘quadruple witching’ rebalancing whereby stock index futures as well as options, stock options, and single stock futures expire simultaneously. In addition, clients traded more global baskets looking for “guaranteed VWAP,” where trades are executed exactly at the VWAP price.