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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.
2023 was an exceptional year for global equity ETPs. Until the fourth quarter, profits were limited generally to a few tech companies, but gains broadened in Q4. We review fund flows, returns and activity in multiple equity ETP categories.
Actively managed ETPs now account for 1/3 of all U.S. ETP listings, accounting for 6.5% of AUM and 22.5% of fund flows in 2023. Futures-based Crypto ETP activity grew as the year progressed, likely in anticipation of the 11-Jan-2024 launch of cash bitcoin ETPs.
U.S.- listed ETP AUM continued to grow, with NYSE Group markets leading the way. Equities remain the largest asset class, but fixed income products gained ground.