The right strategies for trading equities in volatile markets

Published on 13 October 2020

Equity traders could not afford to be passive in the March sell-off, preferring to take control with direct market access (DMA) and dark trading both coming to the fore. With increased volatility likely later this year we explore the best approaches to trading equity markets in volatile and quieter periods with Tony Nash, managing director for electronic trading at Stifel Europe.

Tony identifies nuanced and layered trading strategies, that allowed firms to ensure best execution while managing market risk, and ways to manage execution using on-the-fly transaction cost analysis (TCA). Importantly the approach to cost of trading needs to be factored in when assessing those analytics.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. In 2020 buy-side equity traders are facing very challenging markets. Tony Nash, managing director for electronic trading at STIFEL Europe, is here to discuss how trading risks and costs are being overcome. Tony, welcome to Trader TV.

Tony Nash Thank you, Dan. Good to be here.

Dan Barnes So tell us, what were the most popular trading algorithms during the recent market volatility?

Tony Nash So we saw a change in behavior from clients who were moving away from passive-based VWAP/TWAP strategies towards more strategic based, almost synthetic DMA strategies where the focus was on finding liquidity at the right price. We also saw a move towards using dark access to get some blocks done, and of course, we have access to 50 venues through Sonic Dark. So that became hands-down our most popular algorithm, because we felt some customers were leaving a block of liquidity in darks, while they were working in the lits, and if it hit the limit, they were happy to get done.

Dan Barnes A stock price action is actually difficult to predict. What sort of strategies do you think clients should be using?

Tony Nash I think one of the hardest choices for a trader, when you have stocks trading linearly down, for example, and you’ve got a sell order, is waiting for the bounce. And if the bounce doesn’t come, you run the risk; the longer you wait for being sort of further away from your benchmark and potentially you could have a PM raising their hand saying, ‘listen, I get your sell order in the morning, you’re four percent of the close. You didn’t get me finished or partially completed’. So that’s the risk. And what we did see for those stocks our clients did turn towards more passive-based strategies, like VWAP for example, but with an embedded price. So the idea there is that it almost like a trader hedge, where they will just start trading, using VWAP, at least getting some done. If it bounces, fine, the wood price would take care of some of that. Or in fact, there’ll be an overlay of other strategies as well, which is the other thing that we saw where we offer over 50 different algorithms from five providers. So a considerate wide range of choice and they would often overlay three or four strategies for the same order.

Dan Barnes How did the volatility affect the actual trading objectives that they were trying to achieve through that execution?

Tony Nash We immediately saw a shift towards a change of intraday behavior from clients books with implementation shortfall as a benchmark. And we found there was much more a focus on; what was the price when they started the order and how are we doing versus that? Also, we found that there’s an increased need for us to provide in-flight TCA to the clients. So we created products where we could at any point during the day, have a good grasp of where clients are executing, which venues they’re executing in and then advise them on the fly accordingly.

Dan Barnes So what impact did that have on execution approaches to different funds?

Tony Nash We saw customers moving away from a single strategy used against an order to using multiple strategies and overlaying them against orders. So typically, customers would put up maybe half the order in the darks at a limit that they want, and then secondly, they might have a strategic, almost like a synthetic DMA order, where it would pounce on a certain price in the lits that were available. And then they’d have a liquidity-seeking strategy that would maybe post some of their order shapes and never cross the spread.

Dan Barnes And how does that differ from trading in less volatile markets?

Tony Nash So we found that in less volatile markets, there was a focus on counterparty risk. There was a focus on more compliant-based issues. So TCA was a requirement that was focused on less for trading but more for compliance issues and post-trade monitoring. We also found much more use of passive strategies, like VWAP’s, but also sort of in line with volumes and also CLO strategies. But we would advise them based on the in-flight TCA that we were providing, and it really hinges on this Low Touch Plus-model that we have, where we give what feel are the best agreed algorithms to clients. But also you’ve got five electronic sales traders that are experienced that can help guide clients away or towards different strategies.

Dan Barnes Tony, how has the cost of trading changed over the period of 2020?

Tony Nash In a normal environment, you’d find the customers are happy being 10 basis points away from a rival price where volatility is low. Obviously, the standard deviation is low and spreads are quite thin. Now when spreads double or triple and there’s a drop in liquidity, you do find that customers’ expectations in terms of value changes too, so they might be happy with 25 basis points away from a rival price. Why? Because volatility has quadrupled or gone up five times, spreads have gone up three times, and liquidity is far more patchy. If you have a look at 15 minutes after you’ve stopped trading and the stock bounces back, in a highly volatile environment that has less meaning than it does in low volatility. In other words; when it bounces back quite aggressively in a low, volatile environment, you’ve probably been a bit aggressive on your participation ratio. If it’s low, however, then you have got the capacity to increase. We found that clients are now being very engaged with changing their behavior according to these numbers, and they’ve shifted their mindset away from what value is perceived in volatile markets and not volatile markets.

Dan Barnes Tony, that’s been excellent.

Tony Nash Thanks very much, Dan.

Dan Barnes I’d like to thank Tony for his insights and, of course, you for watching. To catch up on our other shows, go to or