Eden Simmer, head of global equity trading at Pimco, offers a comprehensive analysis of equities volumes, activity, and liquidity so far this year—including views on some of the unprecedented daily moves.
Eden discusses the need for a robust framework for managing execution and implementation costs in stressed markets; the importance of having the necessary electronic toolkits to optimize trading strategies and how her traders and portfolios managers collaborate on the equities desk.
Interview
Jo Gallagher: Set the scene for us, describe what you’re seeing in equities trading and liquidity right now.
Eden Simmer: You know, that’s an interesting question currently because we’ve seen such a broad spectrum of you know, sort of trading conditions and liquidity from April till now. You know, in April, you had a period where the VIX was above 50. S&P was below 5,000. And then fast forward to today, we have a 17-18 handle in the VIX with S&P you know, sort of on the trajectory back towards early March, you know Jan- Feb levels. So I think it’s probably more interesting to talk about what we saw in April. Because certainly, that was more exciting. And with that, it’s important to define what we mean by liquidity. You know, certainly, it’s not the volumes posted, right? In April, those were at record highs on exchanges. But really the trading conditions that we saw, you know, sort of on a minute-to-minute basis. And we saw those deteriorate significantly. You know, we saw a top-of-book depth, order book depth, drop to COVID lows. To give you an idea of these single stocks, we saw their top-of-book liquidity in-depth, you know, drop 15%. Bid-ask spreads on average in April, widened out 15% to 20% in single stocks. In futures and equity futures, especially in the S&P, which is something that a lot of investors use to hedge out directional beta risk, it was even worse. We saw top-of-book liquidity on average in April down 50%. You know, some days you see only a contract or two, you know, either on the bid or ask side. Alongside that, you had systematic one investors who usually use a VWAP or percentage of volumes strategy, they had a larger impact, and they exacerbated moves, especially momentum moves to the downside. I think we also saw that ETFs (exchange-traded funds) became a larger percentage of trading volumes. Really so people could get in and out of risk quickly, you know, directional risk, sector risks, and hedge out beta perhaps. And so I think you just saw a confluence of a lot of different trading things that were going on. Especially in the thematic space where you are seeing unprecedented daily moves. I think in thematic macro equity baskets, whether they were tariff wins or losers. Europe Defence, you know, you saw five, seven, ten sigma moves in a given day.
Jo Gallagher: And how do you think think about execution and implementation costs in stressed markets like these?
Eden Simmer: I think it just starts with the basics. You know, you trust your process. You use your toolkit. You communicate clearly even more. You know, it’s important the fundamentals are there of understanding what it is a portfolio manager (PM) wants to implement. Are the PMs informed and their expectations anchored appropriately? What is it they expect in terms of the order itself and that outcome? And has there been enough dialog between the trader and the PM so they can understand what the market conditions are, what the liquidity conditions are? Know, so they can adjust their strategy. Or, you know, have a conversation to really make it more clear of what it is they’re trying to accomplish so the trader can give them the best outcome that they possibly can. Have to just lose, I guess, your attachment to outcomes because you just don’t know where the price may be and forget about five minutes or one minute. You don’t know where the price is going to be in the next five seconds, ten seconds. Another factor is what tools do the traders have in their toolkit to be able to, you know, pivot, change strategy, be nimble, be agile, you know in these types of environments. What kind of access do they have to customize algos? What kind of suite of ATSs (alternative trading systems) and ECNs (electronic communication networks) do they have? You know, broker balance sheet. Even portfolio tools like optimizers that can reduce transaction costs and turnover, and tracking error. Cutting out any kind of unnecessary trading to achieve the same result. And I think, you know, real-time risk analytics and trade data feeding back into the investment process so everybody sort of has the same reference point that you can use just across the whole investment framework is important as well. I think traders need to also assess, are they able to use derivatives or Delta 1 instruments to hedge out certain risks? I mean, there may be cases where programs could take longer. But being able to use these types of instruments to hedge out beta risk or sector index risk. Could really allow for more thoughtful implementation of actual underlying trading. One last thing is the sort of unsung hero in all of this, which is process. How good is your process? How robust, tried and true, stress tested? In these types of environments, you see cracks, you see gaps, and that can make all the difference between getting to the market you know, quickly. Versus being mired down if there are manual inputs or whatnot or manual steps. And so if your process is a robust process, stick well within that, but be open-minded to changing strategy quickly, making sure that you are using and assessing all the tools in your toolkits be able to do that.
Jo Gallagher: What does that collaboration across the trading and desk look like in practice?
Eden Simmer: In terms of like real-time communication, you know, with traders and PMs, I do liken it to sort of a college term paper, which is, you know, very repetitive in terms of you know, thesis, body conclusion, which is, you know tell the PM what you’re going to do. Tell them what you’re doing and tell them what you just did and create a lot of space for back-and-forth adjustments. You know, like I said before, pivots, agility during volatile periods. I mean, this is critical because assuming is the root of most issues on a trading desk. And so it’s really important to just take as many of the assumptions as possible out of this process. I think it’s helpful for traders to attend PM strategy meetings to hear real-time discussions, investment thesis live, like what’s working, what they’re focused on on that given week, on that give day. And bring that back to the desk and socialize it so that we as a desk can think about. How to monitor, how to provide information back to the PMs in terms of markets and what they may find interesting and certain themes. Another aspect of it is being able to seek and recommend different trading strategies in terms of trade-off liquidity, transaction costs, leverage, economics, whether it’s an optimized basket of futures, a total return swap. An option structure, a basket of, you know, underlying physical regional stocks, ETFs, whatever it could be, just being able to present them with a suite of options so that they can really decide what is going to fit their investment thesis the best. That’s one way that trader can really put themselves higher up in the value chain of this investment process.
Jo Gallagher: I’d like to thank Eden for her insight, and of course you for watching. This has been Trader TV This Week.
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