In the current environment, markets have changed in terms of volumes, volatility and intraday trading to name a few. Below, we look at how the coronavirus has impacted the market.
The Role of ETPs
ETP activity has increased significantly, but not all ETPs are US equity-based. Trading of fixed income and commodity ETPs (almost 25% of ETP activity) generally does not affect US equities.
Why the VIX is a Misleading Indicator of “Fear”
The VIX is calculated based on the price investors are willing to pay for 1m put and call options. Investors generally buy put protection when they “fear” a market downturn. However, when the market has already fallen significantly and total assets are lower, there is simply less need to buy as much put protection, so the VIX may come down as the market comes down – but that doesn’t necessarily mean investors are any more confident that the downturn is over.
Trading in leveraged ETPs, including short, accounts for about 5% of all US equity trading, significantly less than in the financial crisis.
Record Daily Trading Volumes – but Not for ETPs
ETP activity has increased, as is typical when volatility increases, but their share of total US notional trading is still less than it was in the financial crisis. Notably, leveraged ETPs play a much smaller role today than they did in 2008/09, when they were often blamed for disrupting end-of-day trading and causing additional volatility.
Weekday Volume Less Predictable
Daily volumes have historically followed a predictable pattern through the week, with volumes building through the work week and declining on Friday as traders close out positions to avoid carrying risk through the weekend. This pattern has proved consistent over many different volatility regimes for over a decade, and globally.
Close Volume Down Significantly
Close volume has declined significantly this year after steadily increasing for the past decade. Market-on-Close (MOC) volume for largecaps has gone from over 12% of the day’s volume in December to less than 8% now.
• Possible reasons may include:
− The NYSE floor closure in March, which eliminated the use of the flexible D Order orders (though the floor reopened again in late May).
− An increase in urgency and less opportunistic trading at the end of the day. More volume is now trading earlier in the afternoon.
− The increased retail presence, since retail tends to be more active around the open and not the close.