Michael Blaugrund

Head of Equities, NYSE

Paul Kenyon

Head of Sales and Relationship Management, NYSE

Steven Poser

Director, Research, NYSE

Kevin Tyrrell

Head of Equities Strategy and Research, NYSE

NYSE is starting this forum to share data-driven insights from our trading systems and thoughts on key market structure topics. We welcome any and all feedback to

April 12, 2018

Can You “De-Fragment” Small Cap Trading?

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.

- Steven Poser

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

April 5, 2018

Setting the Stage: Opening Stocks During Times of Stress

We’ve discussed the importance and liquidity of closing auctions, but during periods of high volatility the opening auction is also a key source of liquidity. What’s more, the NYSE opening process reduces investor transaction costs by tens of billions of dollars per year.

Opening auctions on NYSE, like IPO auctions and closing auctions, are overseen by the Designated Market Maker (DMM). DMMs can open a stock in an automated manner or, depending on the situation, run a manual auction to aggregate interest and open at a more iterative price. This is especially important for stock-specific events such as IPOs or openings after earnings, or when market-wide volatility increases.

To assess the opening auction’s performance, we analyzed price discovery on the most volatile days in Q1 2018 (Feb. 5&6, March 1&2, March 26-28) relative to price discovery on other “standard” days. We measured open price discovery by comparing the open auction price with the market VWAP over the five minutes following the open auction. As expected during volatile periods, slippage vs. the opening price increased, but NYSE’s opening price performance changed less than electronic venues such as Nasdaq. NYSE-listed securities’ slippage increased by seven basis points while Nasdaq price changes following the open increased by 15 bps.

We also did a more granular comparison, looking at similarly-priced NYSE-listed and Nasdaq-listed opens for the January 2, 2018 through March 28, 2018 period. In each price and volume bucket, NYSE-listed issues achieved superior price discovery at the open.

"On an annualized basis we estimate the transaction cost savings to investors associated with this lower volatility to be roughly $38.5bn."

- Kevin Tyrrell

March 14, 2018

Primary Exchanges & Expiry: More Than Just an Auction Story

With the quarterly expiration approaching on Friday, we reviewed trading from the December expiration to see shifts in price discovery behavior. One widely-known market structure feature is the increase in volume on inverted venues at the end of the trading day, when inverted venues can approach 20% of S&P 500 volume at certain points.

However, during key trading periods such as quarterly expirations, the shares available at primary exchanges1 far exceeds that of inverted venues. We looked at the December expiration’s average quoted size at the NBBO from primary exchanges and inverted venues, and find that primary exchanges’ quoted size at the end of the day increased 38% vs. a standard day2 while inverted venues increased just 18%.

This additional pre-trade displayed liquidity results in more intra-day trading activity flocking to the primary exchanges. Primary exchanges see an increase in volume every day heading in to the closing auction, and the trend is more dramatic on event days such as an expiration. The below chart shows shares trading in the S&P 500 by time period, exclusive of closing auction volume.

"Primary exchanges see an increase in volume every day heading in to the closing auction."

This is the “liquidity begets liquidity” argument on display, with greater displayed size enticing more liquidity-seeking flow. This increasing order volume allows limit order queues to process more quickly, a topic we’ll revisit in a future post.

- Kevin Tyrrell

1“Primary exchanges” refers to trading on the listed market (e.g., NYSE trading NYSE-listed and Nasdaq trading Nasdaq-listed).

2“Standard day” represents an average of December 1st - December 22nd trading activity, excluding December 15th

March 1, 2018

Liquidity Opportunities in the NYSE Closing Auction

While most people know that the NYSE Closing Auction is the single largest liquidity event in the U.S. market, accounting for more than 6% of NYSE-listed volume on a regular basis, fewer are aware of the additional auction liquidity available at nearby price points.

"Additional auction liquidity is available at nearby price points."

To highlight this effect, we show the cumulative additional liquidity available on various days in December for NYSE-listed Russell 2000 and S&P 500 stocks, with colors indicating the distance of the liquidity from the final closing price. The median spread for NYSE-listed Russell 2000 stocks is roughly 29 bps, meaning all additional liquidity represented in green and blue on the Russell chart are on average within 2 spreads of the final closing price. The chart shows that traders who seek out this liquidity, by leveraging a floor broker’s experience and capabilities or by submitting orders at various price points, can find material additional volume.

- Kevin Tyrrell