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.
Beginning & End-of-Day Vol
Distribution of vol throughout the day has been more stable over time for smallcaps, but it has become increasingly concentrated at the poles of the day (beginning and end) for largecaps.
Overnight vs Intraday Vol
Overnight price moves have increased significantly for both largecaps and smallcaps, but the magnitude is particularly high for largecaps. In fact, the magnitude of overnight moves for largecaps is now almost the same as it is for smallcaps and it is almost double what it was during the 2008 financial crisis.
Intraday Price Swings (Hi-Lo)
Intraday vol has come down at every point of the day and we are now back to where we were in the last week of Feb, which was essentially the first week of the “crisis” period. However, levels are still more than double what we were used to in Jan, before this “new normal”.
Despite skyrocketing trade volumes, spreads are wider and order books are more sparse. Traders using a signal driven framework with sophisticated order placement logic can respond to large quotes and set multiple price points to source liquidity.
Volatile markets call for real-time forecasting
Dramatic shifts in the intraday volume curve make real-time, stock-specific metrics more important than ever. Dynamic forecasting using a continuous evaluation process can address VWAP variability.
Bid-ask spreads: large caps hurting more
Bid-ask spreads for large caps have been hurt by this crisis more than small caps' spreads. Small cap spreads have roughly quadrupled in the past 2 months (to a current average of about 80 bps), whereas the average spread for large caps has increased more than 5x to about 24bps.