By Mike Smith, Director, Global Exchange Relations Management, IPC
The COVID-19 pandemic is now a truly global one. With much of Europe, APAC, many other countries and, increasingly, the United States now in lockdown, how has this impacted market activity in terms of volatility and execution volumes? Where is the liquidity? How are market participants reacting to the uncertainty, both short and longer term, that COVID-19 creates? Are we seeing consistent pricing in the available market data? And last, although very much not least – how is the new norm, of home working under lockdown conditions, impacting patterns of market activity?
Reassuringly, through all of this, we have not seen the same spectacular freezes in liquidity that characterised the last financial crisis. Trading on lit venues actually doubled in volume over the month of February. This should give us all – whether financial institutions, regulators or policy makers – greater confidence in the resilience of the measures that have been implemented around systemic risk and the robustness of systems, processes and controls.
The data tells a story
So what does the available data tell us? At the end of February, just as the pandemic truly went global, volumes spiked as all trading in all asset classes soared over fears and uncertainty around the spread of the coronavirus. We saw a 30-60% increase in monthly trading volumes across the board. Stock exchanges reported trading volumes that haven’t been seen since 2008. As we all know, volatility has an immediate impact on volume levels. From an equities perspective, the S&P 500 suffered heavy damage. Precious metals have not been immune to volatility swings, either. Futures are now rising, as demand increases and as supply is threatened by a looming shortage of precious metals as major refineries shut down.
We also saw circuit breakers kicking in at global exchanges, and at an unprecedented rate. The NYSE circuit breaker kicked in three times during an eight-day span, a previously unimaginable occurrence, on Monday the 9th March, Thursday the 12th March and Monday the 17th March. The data shows us that trading strategies are changing on the fly, as market participants rush to exit their equities positions and go long on fixed income instead, with a surge in uptake of bond ETFs. It is possible that, as the markets settle down over the coming months, these positions will be unwound, with investors buying back into equities and selling off the fixed income ETFs to which they have hurriedly retreated.
Resilience in a digitally, connected and decentralized world
We may start to see changes in market concentration. Larger firms have the ability to plan for large-scale contingencies and shifts in working patterns – indeed, the vast majority of jurisdictions have made this a regulatory requirement since the global financial crisis. This gives them an advantage over smaller financial institutions, which may not have the IT support necessary to rapidly transition to a dispersed, off-site trading workforce in a matter of days.
Smaller firms, on the other hand, may also have an advantage in terms of agility and reaction speed. Transitioning a smaller workforce to tactical trading processes and technology solutions is far easier than transitioning a workforce of hundreds or even thousands. It remains to be seen whether larger and more prepared firms are taking market share, as smaller firms struggle with the transition, or whether these dynamics create different, less predictable outcomes.
New working patterns create regulatory challenges
For trading venues that operate fully lit order books, times of high volatility create significant challenges in maintaining liquidity on their platforms. During these times, market participants traditionally turn to voice execution with their trusted counterparties. This in itself creates challenges in the current regulatory environment. For trades executed on-venue, the requirements around pre- and post-trade transparency, transaction reporting and order record keeping largely fall to the venue operator. In the case of off-venue, bilaterally executed trades, these obligations fall to the respective counterparties, some of whom may struggle with data capture where trades are potentially executed on unrecorded mobile phones.
In addition, the regulatory landscape in different jurisdictions is not always easy to navigate. In the US, FINRA has relaxed some rules, taking into account that traders will necessarily be working from home, subject to their employers’ ability to demonstrate adequate supervision and oversight – arguably a more process-driven and pragmatic approach. To the dismay of compliance officers in the UK, however, the FCA has made clear that it will not be relaxing any of the MiFID and MAR requirements around data capture. This may have an impact on the ability of different jurisdictions to fully investigate potential market abuse, post-COVID-19.
IPC continues to support our global financial markets
In the current stressed market conditions, liquidity has become fragile as investors have simultaneously reduced their tolerance to risk and are deleveraging. With this mass exodus from risk, there is a significant premium for liquidity. Under these conditions, it becomes important to have a diverse ecosystem of market participants and trading platforms so that buyers and sellers can find each other in a reliable and secure manner.
IPC has nearly five decades of history in this space, and we have enabled our clients to weather many a storm. This might be our most challenging yet, as a global community of financial markets participants. Throughout this time, IPC remains focused on empowering all of our clients to maintain business continuity. We are dedicated to supporting our customers’ business continuity and disaster recovery plans through a variety of our products and services such as IQ/MAX® Omni, Remote Devices, EVS as a Service and Disaster Recovery as a Service.
In addition, from a network perspective, the ability to rely on robust and resilient infrastructure such as IPC’s Connexus Cloud platform, an ecosystem that interconnects more than +7,000 diverse capital market participants across 750 cities in over 60 countries can be vital for markets and customers, when liquidity is becoming fragile.
© 2020 IPC Systems, Inc. All Rights Reserved. The contents of this publication are intended for general information purposes only and should not be construed as legal or regulatory advice.