Our recent article, “NYSE DMMs: Meeting the Volatility Challenge” highlighted our performance when liquidity spiked on January 24, 2022. We showed that NYSE-listed companies had tighter quoted spreads compared to Nasdaq-listed companies and achieved 2 times better accuracy on the opening auction and 3 times better accuracy on the closing auction1. In this article, we take a deeper dive into NYSE listed-company performance when volatility is high, with a special focus on the Designated Market Maker (DMM).
We reviewed market quality and DMM statistics from the start of 2021 through mid-February 2022. We tracked all corporate issues, including SPACs and ADRs, and calculated statistics for each stock on their most volatile days separately from less volatile days2. We then compared quoted spreads, open and closing auction accuracy, DMM liquidity provision and price improvement on volatile and less volatile days.
Share of DMM Volume That Improves the NBBO
Liquidity Provision Change
DMM Liquidity Provision vs. Quote Volatility
February 11, 2022
DMM Provide Participation is indexed to 12:00PM = 100. The horizontal axis is also reformatted to just show time.
News announcements on company earnings and geopolitical events are often made outside of market hours. News breaking between the prior day’s close and the current day’s opening result in volatility usually being highest following the opening auction. NYSE stocks exhibit much lower volatility post-open than Nasdaq stocks. On volatile days, Nasdaq open auction accuracy worsens by more than 60 basis points, nearly twice the change on NYSE.
Similarly, NYSE’s closing auctions hew much closer to late day trading than Nasdaq’s, and the advantage increases when the market is volatile. NYSE closing slippage on volatile days is more than 20% better than Nasdaq’s closing slippage on less volatile days!
Open Auction Price Dislocation
Closing Auction Price Dislocation
Spreads tend to widen as well as volatility sparks. Prices tend to move in one direction, which means market makers are more likely to be forced into losing positions. To offset this risk, market makers increase spreads at these times. NYSE spreads widen by 53.6 basis points on average on high volatility days compared to a 77 basis point jump for Nasdaq-listed stocks.
Consolidated Quoted Spread
There have been many episodes of extreme volatility in recent history, and with political and economic uncertainty across the world we can likely expect more volatile days in the future. The NYSE DMM is the only market participant obligated to meaningfully provide liquidity and contribute to price discovery in any market condition. This unique obligation produces higher market quality at the open, the close, and throughout the day for NYSE-listed companies.
Activity in NYSE’s Retail Price Improvement Program for stocks not listed on the NYSE has shown strong growth since its launch last December. Tape B activity recently peaked at more than two million shares.
To enhance visibility and understanding of the Closing Auction process, NYSE has introduced a graphical interface with a trailing three months of closing imbalance feed historical data for the 1,000 largest daily Closing Auctions.
NYSE research reviewed option usage trends to end 2022 and start 2023: 2022 options market activity was generally aligned with equity market moves. Average monthly put-call volume ratio in 2022 was higher than 2021 but declined sharply at beginning of 2023. In 2022, floor traded a higher put premium relative to call but a much lower put premium in 2023. Moreover, electronic trading saw more activity in SPY and QQQ, while floor trading saw most activity in HYG. Also, floor trading had a significantly higher put-call ratio than electronic trading for days around FOMC meetings and CPI announcements over most of this period.