Analysing equity execution in H1 2020

Published on 16 June 2020

With the extreme market volatility in March and subsequent responses at a central bank and regulatory level, working out where best to trade equities has been challenging for buy-side traders. Lit and dark venues not only provide different advantages, but as short-term structural changes – such as short-selling bans – were imposed, some trading strategies which favour certain venues would have died off, impacting the availability of liquidity.

Anish Puaar, European Market Structure Analyst at Rosenblatt Securities gave us his expert insights into equity trading in the first half of the year, and the potential dynamics which will affect it going forwards.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. With me today is Anish Puaar, European market structure analyst at Rosenblatt Securities. Anish, welcome to Trader TV.

Anish Puaar Hello Dan, thanks for having me.

Dan Barnes So we’re going to discuss what’s been happening in the equity markets over the March period of volatility. Just to start with, how would you characterize liquidity and trading flows during that very volatile period?

Anish Puaar I think the first thing to say is that markets actually held up very well, despite seeing very, very high levels of volatility. I’m not sure if they were the highest ever, but definitely the highest ever since the introduction of MiFID I and the fragmentation of equity trading. We saw days where trading volumes were double what they normally were, and we’d see any market outages or anything that would have affected people’s ability to get in and out of positions. The other thing worth saying is the liquidity providers and market makers seem to be present during those high seasons of volatility. So often a criticism leveled at some market-making firms or liquidity providers, whatever you want to call them, are that in times of market stress, they disappear. Given the volumes we saw, that didn’t appear to happen. So you would have seen spreads widen slightly, which you would expect in a very volatile market. But liquidity was there and available for investors to get in or probably out of positions during that time.

Dan Barnes During that period of volatility in March, where did you see trading taking place most?

Anish Puaar Mid-March, when the volatility was at its peak, we saw lit exchanges and lit MTFs, like CBRE and Turquoise, gain a little bit of market share over the likes of dark venues and block venues, where typically you need to rest in there to find a match. And when prices are swinging kind of all over the place, you might be less willing to rest orders in those kinds of markets. And equally, you might be less willing to wait to the end of the day and trade on the closing auctions, so another effect we saw during that period was a reduction in closing option activity. Another effect was a reduction in SI or systematic internalizer activities. A lot of that activity come from banks, central risk books and again during those volatile periods, banks might be less willing to hold themselves out there for capital commitment or risk fluctuations, which would have contributed to a lower SI market share.

Dan Barnes Aside from the actual sell-off itself, what other factors have been impacting liquidity over the last month or so?

Anish Puaar One of the main talking points over the last month or so is the short selling ban, which was enacted in various European countries over the last couple of months. Those bans ended on the 18th of May, but it had an impact on liquidity, and if you look at some hedge funds fx, you have strategies like paired  strategies or offset strategies that rely on a lot of short selling within them. Those strategies may not have been possible and would have affected liquidity, particularly on multilateral trading facilities, alternative venues to domestic stock exchanges. Hedge funds typically prefer those venues because of the lower execution fees compared to exchanges. So you could have seen an outsized impact on MCS losing market share during a short selling ban. So it’ll be interesting to see whether the MTF market share picks back up again, but it definitely sunk to new lows during March and April. It’s also interesting that many markets, including the UK and the US, decided not to implement short selling bans, because they didn’t see as much of a problem with it compared to other European countries like Italy and Greece.

Dan Barnes Yeah. From memory, I remember Greece and Italy having been quite severe on short selling bonds back in 2011, 2012 as well. Historically, those things have been quite down on that process?

Anish Puaar Yeah, and France as well, which is another one I should have mentioned. And those regulations were introduced in the wake of the 2008 crisis, where many European member states took unilateral action to ban short selling in their own countries, which led to a bit of a disjointed process across the whole of Europe. A lot of market participants, including hedge funds and exchanges by the World Federation of Exchanges, fx, has spoken out against short selling bans and have been quick to note that short selling is a legitimate risk management practice and something that helps to keep prices in line.

Dan Barnes So looking forward, what is going to be the dynamics that affect market structure over the next few months to a year?

Anish Puaar Before the pandemic, there were a couple of consultations from ESMA and the European Commission about reviewing MiFID II, so both focused on slightly different things. So ESMA was focused on equity market transparency so that covered trading venues, dark walls, period of auctions, systematic internalizers, and to some extent the consolidated tape. But the commission consultation was broader but had a big focus on the consolidated tape. The ESMA consultation included some quite radical proposals, so things like; more restrictions on dark walls, more restrictions on people at auctions, more restrictions on systematic internalizes. What was interesting to me is in those responses, you saw a broad buy-side support for having a variety of trading venues. Buy-sides saying that we like dark walls, we like SI; they will provide a useful addition to the ecosystem of markets that we have available. They help us to manage market impacts and ultimately help us get the best results for our clients. So it’s going to be interesting to see the extent to which ESMA and the commission, when it comes to reconvene, to take those comments on board. What we saw when MiFID II was being negotiated almost a decade ago now was the buy-side taking quite a similar start, so voicing their support for things like broker-crossing networks and for dark walls, but, in my opinion, the regulators didn’t really seem to take that on board and ban broker-crossing networks and impose strict limits on dark walls. And then on the consolidated tape, that’s a debate that’s been running on for over a decade now, ever since MiFID I came into force in 2007. So a lot of market participants will be hoping that we can come to a solution on that and if something does get created. But there is still quite a wide divergence of opinion. The exchanges, fx, preferring an end-of-day tape of record. Other participants, including brokers and some buy-side firms, really wanting a real time, pre- and post-trade consolidation tape.

Dan Barnes Anish, thanks very much.

Anish Puaar Thank you, Dan.

Dan Barnes I’d like to thank Anish Puaar for his expertise in this show and of course, you for watching. To catch up on our other shows, go to TraderTV.NET or ETFTV.NET.