Timeless Principles of Orderly Markets
By Scott Bradley, Head of Sales and Global Business Development, Cash Secondary Markets and Turquoise, London Stock Exchange Group
What does the equity market response to the coronavirus pandemic tell us about trading in the 21st century? Undeniably, there was a need for both market participants and operators to react swiftly to unprecedented events. But the infrastructure has continued to operate robustly, in terms of liquidity and availability. This was thanks partly to decisive action by central banks, but also to safeguards introduced by regulators and market infrastructure providers over the past decade.
During Q1 2020, London Stock Exchange Group (LSEG), and other major market operators, experienced record volumes. This is an example of our commitment to continue to operate orderly and robust markets to a diverse global community. During this time, we have also been reminded of the enduring importance of networks – human and technological – with market participants favouring execution immediacy and certainty.
Throughout the quarter, we saw the value of offering investor choice through a wide range of trading options, allowing market participants to refine exposures and redeploy capital globally.
A closer look at activity across key markets sheds further light on Q1’s events and what they might tell us about market trends.
The flight to lit
March 2020 saw the highest ever number of trades executed on the London Stock Exchange order book. At 44.8 million, the total towers over the previous record set in June 2016 (when trading spiked after the Brexit referendum). We also saw record volume days, with 2.9 million trades executed on March 12. But on this day, the average trade size was lower, dipping below £4,000, meaning notional executed (£10.6 billion) did not challenge the £15 billion value record set on June 24, 2016.
This combination of factors can be attributed partly to the nature of demand. Much of the global activity was propelled by quant funds looking to exit positions quickly and efficiently as part of enormous waves of deleveraging, especially in the second week of March, typically via direct execution algorithms (DEA). These trades boosted the share of activity conducted in continuous lit markets, rather than auctions or off-exchange options.
Having averaged around £2 billion per day in early February, daily value traded in FTSE 100 stocks in continuous trading on the exchange’s main market rose sharply until end-March. For example, daily value traded peaked at £5.8 billion on 9 March. This ties in with pan-European trends, with average daily value nearing €58 billion on lit continuous markets in March, a substantial increase over 2019’s €28 billion daily average.
This ‘flight to lit’ can be seen in the increase in market share in UK stocks conducted on London Stock Exchange in March. This followed a two-year period in which off-exchange, bilateral trading channels gradually increased market share, notably systematic internalisers operated by banks and electronic liquidity providers.
Back to blocks
In Q1, European dark pools also saw an upsurge in activity, including the Turquoise Plato Block Discovery™ midpoint matching service. Overall, European dark pools saw an increase in average daily value traded (ADVT) with €6 billion through Q1 (€7 billion ADVT in March) as appetite for block trading increased. Recent market volatility sparked the largest volumes traded on Turquoise Plato™ since the Brexit referendum, with daily volumes twice reaching €2.1 billion. But whereas post-referendum trading saw just 3% of total orders executed via Turquoise Plato Block Discovery™, blocks accounted for more than half of our volume on both 28 February (55%) and 9 March (59%). Complementing the speed and certainty provided through the lit continuous channels at LSEG, this ability to find contra liquidity in size through conditional blocks at peak times of market volatility and stress resonated well with customers and highlighted the importance of providing choice of execution channel.
These records reflect our ability to continue to operate orderly markets. They also speak to the broader appeal of a diverse and robust trading ecosystem, where multiple types of participants contribute liquidity across well-defined market segments. Throughout Q1’s turbulence, market participants did not only use their LSEG connectivity to trade UK and European equities. Also accessible via the same tried-and-tested single point of connectivity, firms adjusted their global strategies, both by trading international companies’ GDRs and ADRs, and exchange-traded products (ETPs), offering global and thematic exposures across a range of asset classes.
Activity in the 130+ GDRs listed on our International Order Book (IOB) reached US$570 million in average daily value traded in March, doubling overall Q1 2020 activity versus Q1 2019. In total, US$12.5 billion was traded in March, the highest level since April 2015, including a record US$1 billion traded on 9 March. In parallel, trading in our 1,600-plus ETPs increased by 150%. On 28 February, ETP turnover topped £1.5 billion and March proved a record month for ETP volumes with more than £20 billion traded overall. ETPs currently account for 11% of the exchange’s daily turnover, compared with around 6% five years ago.
Adjusting to new realities
In unusual and unpredictable circumstances, the ability to trade cannot be taken for granted. Almost all market participants faced unprecedented changes in circumstances in Q1, either working remotely from home or back-up facilities. In this context, trading in a climate of heightened news flow and extreme volatility can be fraught with difficulty, notwithstanding today’s highly automated execution processes.
When confidence in price formation becomes more urgent, measures to ensure fair and orderly markets assume greater significance. In the week beginning 9 March, we saw a 20-fold increase in the use of price-monitoring extensions (PMEs), the exchange’s stock-specific mechanism for preserving orderly trading around opening and closing auctions. Rather than pausing the entire market, such as US exchange-wide circuit-breakers, price-monitoring extensions and circuit breakers during continuous trading halt trading in an individual stock if it breaches defined price movement tolerances.
[www.londonstockexchange.com/circuitbreakers]. This allows interested parties to collectively re-evaluate, establishing the most popular price via auction, leaving the wider market uninterrupted.
In extreme market conditions, ensuring orderly trading is essential. Market participants must also know that they can trade, clear and settle efficiently and securely – across multiple market segments – via their LSEG connection. They also know that our diverse ecosystem brings together capital flows from across the globe. But it can still be difficult to find the other side of the trade if liquidity providers are constrained by margin and cash flow pressures. We have always worked closely with our members and redoubled our efforts in recent months to understand their needs.
This has led to a number of practical actions, including a three-month waiver for UK equities market-maker registration fees. When retail demand has tripled, extra measures are needed to ensure two-way pricing is maintained as firms adjust to new, remote, operating environments.
Partnership and innovation
The role of the primary exchange has been under scrutiny in recent decades. But trading activity in the past quarter has reflected the value of partnership and innovation, especially in times of need. By innovating in consultation with clients in recent decades, LSEG has built a trusted, responsive and dynamic ecosystem that relies on core principles to bring diverse buyers and sellers together efficiently.
What does the equities market response to the coronavirus pandemic tell us about trading in the 21st century? Technologies may – and indeed should – change, but principles of fair and orderly markets are timeless.