Equity Trading Fundamentals: How Fast, How Small, How Soon, and How Easy?
In the last 18 months, the credit crunch has distorted equity market conditions significantly, but there are some trends that appear to have continued, despite recent shortfalls in liquidity. To provide some context on these trends, we analyze and quantify the mechanics of trading over a significant period of time, across a wide range of different markets. We confine our study to looking at trading patterns of the most liquid stocks1 in the countries studied.
One of the clear advantages of this cross sectional and historical approach is that it allows the identification of outliers. For equity trading, the clear and consistent outlier is still the US, where trading in the most liquid assets is still faster, and smaller, than the busiest non-US assets.
We attempt to show how significant differences in trading environments are, by looking in detail at the month of October in 2008. We compare all venues analyzed and attempt to place them on the evolutionary line travelled by the NYSE. While interesting, we note that such a comparison implicitly assumes that exchanges will travel the same line. At the very least, the regulatory regimes in different regions should make us question this assumption.
Lastly, we look at bid offer spreads and how they have evolved. These spreads are an important part of transaction cost. We look in particular at how they have evolved over ‘Crunch’ period and beyond.
The Evolution of Size and Speed in Global Equity Markets
Over the past ten years, with the growth of program trading, algorithmic trading hubs have moved from novelty to ubiquity. They now manage a sizeable portion of trading activity in major markets. In doing so, they have transformed what was in effect a paper driven process, where traders would calculate what to execute when, into a fully automatic one. Transaction costs have been pushed down to the limits imposed by profitability. What has this process looked like in terms of trade speed, and size? We consider speed first.
We measure speed in terms of typical intertrade duration; that is, the typical time, in seconds, you would expect to wait for one trade to follow another. Results are aggregated over the countries, for the top ten most liquid stocks, per year. We concentrate on continuous, automated trading.
For the US, typical trading duration has compressed steadily. Intertrade times for liquid assets are typically less than 1 second. Indeed, for NASDAQ, intertrade duration for liquid assets is significantly less than this. In terms of the greatest increase in trading speed – and possibly the greatest increase in automation – Europe stands out.