The jump in market volatility in 2018 has provoked several concerns regarding the nature of today's electronic trading environment. The NYSE's unique hybrid market model, which features a Designated Market Maker (DMM) obligated to provide liquidity and facilitate auctions, offers unmatched stability relative to other global markets, especially during times of market turbulence.
NYSE's auctions differ from those at other equities exchanges because they combine human judgment exercised by the DMM who oversees trading activity, with automated mechanisms. This enables NYSE to conduct a manual auction if deemed necessary by market conditions. To conduct the auction, the DMM aggregates buy and sell interest and executes the maximum volume at a price intended to be reflective of market supply and demand.
The manual auction therefore gives the DMM both price and time flexibility, unlike electronic auctions which because of their automated nature are more susceptible to large price dislocations due to temporary supply and demand imbalances — a scenario which occurred recently during an auction on the Singapore Stock Exchange (SGX). The risk of fast, automated executions has led many global exchanges, including NYSE Arca, NYSE American, and Nasdaq, to implement auction "collars" with others coming on line shortly1.
These collars set price thresholds to help to dampen auction price movement. However, the NYSE Opening Auction consistently outperforms electronic auctions, especially during volatile periods. The NYSE Closing Auction, which is more than 7.5% of total NYSE-listed trading activity, similarly outperforms other auctions.
The chart below shows the weekly count of symbols that experienced price dislocations2 above 1% for both NYSE and Nasdaq Closing Auctions, and the difference between the two measures. As the chart shows, while auction price dislocation tends to increase during periods of heightened volatility, the dislocation in the NYSE Closing Auction is far less severe compared to the dislocation that occurs in the Nasdaq Closing Auction. This is attributable to the DMM's ability to help find relevant closing prices even in challenging market conditions3.
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.