Steve Poser, Director, Research, NYSE
The Treasury Department’s 2017 Capital Markets report recommended that “issuers of less-liquid stocks, in consultation with their underwriter and listing exchange, be permitted to partially or fully suspend UTP for their securities and select the exchanges and venues upon which their securities will trade.”
The argument for eliminating UTP trading is that the limited liquidity in these stocks could aggregate on one venue, reducing the friction associated with accessing a broad number of venues for a shallow pool of volume. However, many of these stocks are already highly concentrated on a small number of venues, so removing UTP trading may have limited impact on available liquidity.
We compared securities in the Wider Tick Pilot Control Group with issues in the S&P 100. As shown in the table below, exchange fragmentation is lower in less liquid securities, with the primary exchanges providing more than 43% of the total displayed quote size. However off exchange fragmentation, as represented by TRF market share, is higher in these same less liquid securities.
We also measured market concentration using a standard economic metric called the Herfindahl-Hirschman Index (HHI). This measure is 67% higher for the tick pilot group than S&P 100 issues when measuring share of liquidity provision by exchange at the national best bid or offer (NBBO). An HHI level above 2,500 is considered highly concentrated; less-liquid and active names are charted below against the wireless and supermarket industries to highlight the relative concentration in the quoting of these securities.
As shown above, primary listing venues already display a substantial portion of the quoted size in less-liquid names. At the same time, off-exchange trading is significantly higher in these names relative to active names, meaning the primary exchange is providing more price information to the market but not receiving a proportionate increase in executions. Aggregating displayed liquidity on a single venue, while allowing off-exchange trading to continue in its current form, could exacerbate this situation as queues lengthen and market makers have more incentive to trade off-exchange rather than compete to tighten spreads in the displayed market. We therefore believe that any such program to concentrate trading on fewer exchanges should be accompanied by rules requiring meaningful price and/or size improvement in the OTC market.
1We chose the control group, because securities in the test groups have seen a substantial increase in fragmentation as market makers seek to improve their queue position when providing liquidity.
2Sources: NYSE TAQ Data
FCC - Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, Including Commercial Mobile Services
Bloomberg: Little Reason to Fear Amazonopoly With Whole Foods Deal
Following the record-setting 40.1 million average daily volume (ADV) in the 1st quarter of this year, Q2 2021 options volume was the 2nd highest of all-time with 37.6 million contracts traded per day. Robust volume was driven in part by market anticipation of a potential earlier rise in interest rates and Fed tapering, as well as increased volume in options on new issues and continued activity in retail-focused stocks.
After-hours trading has been a larger piece of the total trading volume since the onset of the pandemic, with retail presence growing stronger and earnings announcements becoming less of a factor. In this post, we examine the impact of these shifting dynamics on after-hours price discovery and order behavior.
The surge in market volatility and trading volumes since the onset of the pandemic in March 2020 has impacted numerous aspects of equity market trading. One less-studied area has been after-hours trading. After-hours has also seen changes in order flow trends and influences, and here we examine trends and shifts occurring in these sessions.