market rebounds, but liquidity lags
TRANSCRIPT
Trading Strategy: US Market Structure Chartbook
Market Rebounds, But Liquidity Lags
Overall U.S. exchange volumes averaged 7.5bn shares in the
first quarter of 2019, down just 1.4% from 2018 Q1. The
average stock volume was actually close to flat YoY with the
slight drop driven more by a fall in ETF trading volumes. With
the market starting off at a lower base to begin the quarter
though, value traded was 11% smaller - averaging $337bn
daily vs $378bn in the first quarter of 2018.
However, the quarter-over-quarter change was a much more
significant change with average daily volumes falling 11%
versus 2018 Q4 amidst a decline in market volatility as the
market rose. The Fed pivot likely played a role in helping U.S.
equities rebound and lifting stock indices close to all-time
highs.
Relative ETF trading drops: As volatility dropped, ETF
trading also fell from over 30% of daily value traded in 2018
Q4 to more normal levels in the mid to high 20s this quarter.
We’ve shown in the past that ETF volumes are especially
correlated to volatility (even more so than stocks) and the first
quarter was no different. Interestingly, even as overall ETF
volumes declined, ETF block trades have increased as a
percentage of volumes – reflecting a strong institutional
presence. In particular, fixed income and international equity
funds have been increasingly active in the block space.
Trading costs trend back down, but still elevated: As
the market came to an uneasy calm, several measures of
liquidity reverted closer to recent norms. Bid-ask spreads
returned to pre-October levels with the average large-cap
spread between 3 and 4 bps. Additionally, our impact cost
index also decreased significantly - although costs still remain
above previous lows.
But market depth remains shallow: While many measures
of liquidity have improved substantially and stock indices are
back near record levels, market depth remains relatively
shallow. Aggregate top-of-book depth for the components of
the S&P 500 (and similarly for S&P 500 futures) have slowly
climbed upwards, but are still below pre-October levels and
well below the average depth during 2016-2017. Thus, the
contradiction between this lack of liquidity depth and the stock
market highs creates a significant amount of uncertainty.
Without sufficient depth, volatility shocks could be
accentuated and this reinforces our previous views that the
liquidity environment continues to support a market that can
quickly switch between volatility extremes.
Could
Market Commentary 15 April 2019
Victor Lin + 1 415 836 7643
Exhibit 1: ETF Trading Reverted Back to Less Extreme Levels in Q1
Source: Credit Suisse Trading Strategy, TAQ
Exhibit 2: Estimated Impact Costs Came Down With Volatility
Source: Credit Suisse Trading Strategy, TAQ
Exhibit 3: Depth Remains Shallow Even as Equities Near Highs
Source: Credit Suisse Trading Strategy, TAQ
0
10
20
30
40
50
60
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
Jan
-17
Jan
-18
Jan
-19
Imp
act
Co
st (
bp
s)
TRADING STRATEGY
Intraday volatility subsides
Intraday volatility curves nearly halved from the fourth quarter of 2018. On average, the price volatility during the day ended up similar
to the second quarter of 2018, in between the extremes of the volatile 2018 Q4 and the quiet 2018 Q3. Based on the intraday
volatility curves, we can estimate impact costs at different times of the day and also see how they compare historically. Impact cost
models show that as much as volatility has declined this quarter, the estimated impact of trading near the open currently is as much (if
not more than) trading near the end of the day during the volatile Q4. Note that these estimates are projected for a single stock; a
basket of stocks (e.g. an index) would on average have less total impact at the beginning of the day due to diversification (the
diversification benefits would decline as we move closer to the market close and stock moves become more correlated).
Exhibit 4: Intraday Volatility (log scale) Exhibit 5: Intraday Impact Cost Estimates
Source: Credit Suisse Trading Strategy, (trade size 10% of ADV, participation rate 10%) Source: CS Trading Strategy, TAQ, (trade size 10% of ADV, participation rate 10%)
Calendar liquidity tendencies
Volumes generally reflect volatility and information flow. This can manifest in calendar-oriented tendencies as we show in Exhibits 6
and 7. Historically on normal days (i.e. no major scheduled liquidity event), Thursday has the highest volumes, especially as there
tend to be a larger proportion of earnings releases on this day. Conversely, Monday sees the lightest activity. For the most part,
those patterns have held in 2019. However, Friday has been unusually busy as well – perhaps aided by risk aversion to holding
positions over the weekend given certain macroeconomic and geopolitical uncertainties.
In terms of other calendar-related triggers, there are perceptions that quarter-end and month-end are above-average volume days.
This is the case for month-end days, which have seen volumes about 10-20% higher than average over the past few years.
However, in recent years this has not been the case for quarter-end days, possibly as traders take advantage of the liquidity available
on triple witch instead.
From a major event perspective, triple (or quad) witching are the biggest scheduled liquidity events and the volumes on March 15th
were in-line with previous years. MSCI (last business day of May) and Russell (June 28th this year) are the next big liquidity events on
the calendar.
Exhibit 6: Average Trading Levels by Day of Week Exhibit 7: Special Event/Day Liquidity
Source: Credit Suisse Trading Strategy, TAQ
Source: Credit Suisse Trading Strategy, TAQ
TRADING STRATEGY
Global Volumes
Source: Credit Suisse Trading Strategy, TAQ, Bloomberg, Date through March 2019
TRADING STRATEGY
US Volumes
Source: Credit Suisse Trading Strategy, NYSE TAQ, Bloomberg, Data Through Mar 2019
Avg stock prices rise back near
highs. Avg trade size has bottomed
TRADING STRATEGY
Intraday Volatility
Source: Credit Suisse Trading Strategy, Bloomberg, NYSE TAQ, Data Through Mar 2019
Bid-Ask Spreads
Source: Credit Suisse Trading Strategy, NYSE TAQ, Data Through Mar 2019
Volatility in the 1ST quarter of 2019
trends down.
Spreads back down to
pre-October levels
TRADING STRATEGY
Volume Curves and Closing Volumes
Source: Credit Suisse Trading Strategy, NYSE TAQ, Data through Mar 2019
Closing auction volumes continue to climb
TRADING STRATEGY
US Equity Market Share Breakdown
TRADING STRATEGY
ATS Market Share
Source: Credit Suisse Trading Strategy, FINRA
TRADING STRATEGY
Regulatory Radar As of April 2019
Topic Description
SEC
• WH Nominates Allison Lee: The White House nominated Allison Lee for the last open seat on the Commission and would be the second Democrat on the Commission. She served at the SEC from 2005 to 2018 in various roles. If confirmed (potentially late Q2 or Q3), the SEC would be back to a full slate of Commissioners.
• 2019 Market Structure Agenda: SEC Chairman Clayton and Brett Redfearn (Director of Trading & Markets) recently gave a speech on equity market structure and highlighted their 2019 agenda, focusing on addressing issues discussed in 3 roundtables last year on market structure for thinly-traded securities, regulatory approached to combating retail fraud, and market data and market access.
Market Data and Access
• The SEC raised concerns that the current two-tiered system of market data and market access (core data and proprietary data) may no longer be appropriate as technology and business practices have evolved.
• Many feel that the core consolidated public data feeds may no longer be sufficient to trade competitively. The SEC suggested exploring improvements related to speed, content, order protection/best execution, depth, governance, transparency, and fair access. Clayton also suggested a review of Reg NMS may be forthcoming.
Thinly-traded Securities
• The SEC is considering allowing issuers of thinly-traded securities to suspend unlisted trading privileges (“UTP”) for non-listing exchanges, while continuing to allow off-exchange trading to maintain competition amongst trading venues. See Nasdaq 2018 application seeking to suspend UTP of certain Nasdaq listed stocks.
• The intention would be to not only aggregate liquidity, but also to foster innovation such as periodic auctions, manual market making, etc.
Transaction Fee Pilot
• Transaction Fee Pilot on Hold: The Transaction Fee Pilot is largely on hold as the SEC addresses legal challenges from the New York Stock Exchange, Nasdaq, and Cboe.
• Previously, the SEC adopted new Rule 610T of Regulation NMS to conduct a Transaction Fee Pilot in NMS stocks to study the effects of transaction-based fees and rebates on order routing behavior, execution quality, and overall market quality. The SEC will subsequently announce dates for the pre-Pilot, Pilot, and post-Pilot Periods. Approximately one month prior to the beginning of the Pilot Period, the SEC will issue the List of Pilot Securities and Test Group assignments.
• There are two test groups and a control group. The first test group would have fee cap of 10 mils ($0.0010) and the second test group would prohibit rebates and linked pricing.
• Each group would have 730 NMS stocks with average daily trading volumes greater than or equal to 30k shares with a share price equal to or greater than $2.
• The Pilot will require the national securities exchanges to prepare and post on their public websites transaction fee and rebate data on a monthly basis. In addition, the Pilot will require the national securities exchanges to prepare and provide to the Commission, on a monthly basis, aggregated order routing data.
Exchanges
• Nasdaq and Euronext continue to compete to buy Oslo Bors. • Virtu completed its acquisition of ITG in a cash transaction valued at a total of ~$1bn. • Bank of America Merrill Lynch, Charles Schwab, Citadel, ETrade, Fidelity, Morgan Stanley, TD Ameritrade, UBS, and Virtu
are planning to launch a new, low-cost exchange (Members Exchange, or MEMX). Jonathan Kellner was appointed CEO of the venture.
• ICE is contemplating a speed bump (3-millisecond) for its gold and silver futures contracts.
ETF Rule Proposal
• SEC proposed on June 28th
that an ETF Rule be adopted. The rule is intended to provide a consistent framework for ETFs operating under the Investment Company Act of 1940 to operate without seeking exemptive relief.
• Daily Transparency: Requiring all issuers to disclose daily holdings. • Custom Baskets: Allowing issuers to utilize custom creation/redemption baskets (provided certain conditions are met). • Website disclosure: ETFs would be required to disclose certain information on their websites intended to educate
investors about the efficiency of an ETF’s arbitrate process. • The comment letter period closed October 1, 2018.
Consolidated Audit Trail
• Plan approved in Nov 2016 to create a consolidated audit trail of all NMS securities. • FINRA was selected in late February to replace Thesys Technologies for the implementation of the project. • For equities, testing is expected to commence in December with a go-live data of April 2020 barring any further delays.
Global Market Commentary Disclaimer *
References to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse AG operating under its Global Markets division. For more information on our structure, please follow the attached link: https://www.credit-suisse.com/us/en/about-us/our-company.html.
This material has been prepared by individual traders or sales personnel of Credit Suisse identified in this material as “Authors” and not by Credit Suisse's research department. The information contained in this document has been provided as general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated financial service. It is intended only to provide observations and views of these traders or sales personnel, which may be different
from, or inconsistent with, the observations and views of Credit Suisse research department analysts, other Credit Suisse traders or sales personnel, or the proprietary positions of Credit Suisse. Observations and views expressed herein may be changed by the trader or sales personnel at any time without notice. Credit Suisse accepts no liability for losses arising from the use of this material.
This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view of a particular market. It is not investment research, or a research recommendation for regulatory purposes, as it does not constitute substantive research or analysis. The information provided is not intended to provide a sufficient basis on which to make an investment decision and is not a personal recommendation or investment advice. While it has been obtained from or based upon sources believed by the trader or sales personnel to be reliable, each of the trader or sales personnel and Credit Suisse does not represent or warrant
its accuracy or completeness and is not responsible for losses or damages arising from the use of this material.
This material is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. It is directed exclusively at Credit Suisse's market professional and institutional investor clients (e.g. QIBs) as defined by the rules of the relevant regulatory authority, and
must not be forwarded or shared with retail customers or the public. It is not intended for private customers and such persons should not rely on this material. Moreover, any investment or service to which this material may relate will not be made available by Credit Suisse to such private customers.
This material may have previously been communicated to the Credit Suisse trading desk or other Credit Suisse clients. You should assume that the trading desk makes
markets and/or currently maintains positions in any of the securities mentioned above. Credit Suisse may, from time to time, participate or invest in transactions with issuers of securities that participate in the markets referred to herein, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. Information provided on any trades executed with Credit Suisse will not constitute an official confirmation of the trade
details, and all preliminary trade report information is subject to our formal written confirmation.
FOR IMPORTANT DISCLOSURES on companies covered in Credit Suisse Global Markets Division research reports, please see www.credit-
suisse.com/researchdisclosures. To obtain a copy of the most recent Credit Suisse research on any company mentioned please contact your sales representative or go to http://www.credit-suisse.com/researchandanalytics.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding
future performance. Backtested, hypothetical or simulated performance results have inherent limitations. Simulated results are achieved by the retroactive application of a backtested model itself designed with the benefit of hindsight. The backtesting of performance differs from the actual account performance because the investment strategy may be adjusted at any time, for any reason and can continue to be changed until desired or better performance results are achieved. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor a
guarantee of future returns. Actual results will vary from the analysis.
Investment principal on securities can be eroded depending on sale price or market price. In addition, there are securities on which investment principal may be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
European Market Abuse Regulation (Securities Traded on EU-Regulated Markets)
The date and time published on the title page of this material (the “Published Date and Time”) are the date and time of completion of production of this material and the date and time of its first dissemination.
The European Market Abuse Regulation (596/2014) and associated rules (“MAR”) define “investment recommendations” as information recommending or suggesting an investment strategy, explicitly or implicitly, concerning one or several financial instruments or the issuers, including any opinion as to the present or future value or price of such instruments, intended for distribution channels or for the public. To the extent this material contains any “investment recommendation” as defined under MAR for a
security traded on an EU-regulated market, the Published Date and Time are also the date and time of completion of production, and the date and time of first dissemination, of any such “investment recommendation” (unless otherwise expressly specified in this material).
This material is produced and distributed by Credit Suisse and its subsidiaries and affiliates. Such subsidiaries and affiliates may include: Credit Suisse Securities (Europe)
Limited, Credit Suisse Securities (USA) LLC, Credit Suisse Management (Australia) Pty, Credit Suisse Securities (Japan) Limited, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Singapore Branch, Credit Suisse (Hong Kong) Limited, Credit Suisse Securities (Johannesburg) Proprietary Limited.
Please follow the attached hyperlink for important further information regarding conflicts of interest, disclosures, and a history of our “investment recommendations” as defined by MAR: https://rave.credit-suisse.com/disclosures/view/nr
ASIC Disclaimer Credit Suisse Securities (Europe) Limited ("CSSEL") and Credit Suisse International ("CSI") are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence ("AFSL") and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 ("Corporations Act") in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act) (hereinafter referred to as
“Financial Services”). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act.
Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which
differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services.
Investment banking services in the United States are provided by Credit Suisse Securities (USA) LLC, an affiliate of Credit Suisse Group. CSSU is regulated by the United States Securities and Exchange Commission under United States laws, which differ from Australian laws. CSSU does not hold an AFSL and is exempt from the
requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services.
Credit Suisse Equities (Australia) Limited (ABN 35 068 232 708) ("CSEAL") is an AFSL holder in Australia (AFSL 237237). In Australia, this material may only be distributed to Wholesale investors as defined in the Corporations Act. CSEAL is not an authorised deposit taking institution and products described herein do not
represent deposits or other liabilities of Credit Suisse AG, Sydney Branch. Credit Suisse AG, Sydney Branch does not guarantee any particular rate of return on, or the performance of any products described.
1 For region specific disclosures, including information about applicable registrations and certain regulatory disclosures, please follow the links below:
Americas: https://www.credit-suisse.com/legal/en/ib/market_commentary.jsp
Europe: https://www.credit-suisse.com/legal/en/ib/europe.jsp (Credit Suisse Securities (Europe) Limited is authorised by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom)
Asia: https://www.credit-suisse.com/legal/en/ib/market_commentary_disclaimer_asia.jsp
General investors in Japan should open the following link and read it:
https://www.credit-suisse.com/jp/investment_banking/ja/disclaimer/ © 2019 CREDIT SUISSE