Infrastructure Amidst Market Volatility – Part 1: A Strange and Uneasy Time

Editor’s Note: This is the first in a two-part series by leading global capital markets expert Larry Tabb.

It’s certainly a strange and uneasy time. Not only did COVID-19 force countries into lockdown, but also the combination of poor planning, uncertainly, economic shuttering, and trillions of U.S. dollars in global stimulus has markets roiling. Just in the United States, the intraday Cboe Volatility Index (VIX) — a leading indicator of market volatility – has peaked at almost record highs (85.4). This surpassed the peak level of 80.74 in the global financial crisis of November 2008. We’ve seen waves of buying and selling as peak share volumes on US equities exchanges hit 19.4 billion shares, which is only comparable to the height of the 2008 global financial crisis. However, if you look at the value of U.S. equities traded, it far eclipsed that of the financial crisis, as almost $1 trillion in value turned over — a staggering 89.6% increase over the highest value traded during the height of the global financial crisis (see Exhibits 1 and 2).

Although market volume was record breaking, the industry generally managed these volumes without falling over. One or two brokers were initially crippled by the volumes, but all of the exchanges and industry infrastructure managed this volume in hand. These firms certainly deserve our respect, given that in March 2020, average trading volumes were 126% higher than the previous March.

Most brokers and asset managers didn’t collapse, but a substantial increase in volatility and volume should have them rethinking their infrastructure capabilities. This is especially true now: they need more automation and are facing more complexity to analyze markets, develop pricing strategies, and manage risk. As algorithms become more complex, trading models need to analyze more data in different ways and from different sources. If not managed appropriately, this will cause anything built on a rocky foundation to be as stable as the Leaning Tower of Pisa, especially if volumes and volatility remain elevated.

Join me soon for part two, “A New Foundation,” where we will discuss the way forward for technology in capital markets: how can they thrive in this new paradigm?

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About the Author

Larry Tabb
Independent Analyst / Consultant
Tabb Advisors

Larry Tabb is an independent analyst and consultant at Tabb Advisors, focusing on financial markets, fintech, and capital/financial markets issues. He has also served as the founder and research chairman of TABB Group, the research and strategic advisory firm focused exclusively on capital markets and vice president of TowerGroup’s Securities & Investments practice, where he managed research across the capital markets, investment management, retail brokerage and wealth management segments. He has also served as a member of the CFTC Technical Advisory Committee Subcommittee on Automated and High Frequency Trading (HFT) and testified at the Senate Subcommittee on Securities, Insurance and Investment session on “Computerized Trading: What Should the Rules of the Road be?” Larry has been cited extensively in The Wall Street Journal, Financial Times, Associated Press, The New York Times, CNN, Bloomberg, CNBC, Reuters, Dow Jones News, Barron’s, Forbes, Business Week, Financial News, & other major business media.

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  1. Larry Tabb

    May 1, 2020

    Yes, I believe that is the case. If you look at Tape B market share (A is NYSE, C is Nasdaq, B are regional listings – which is where most of the ETFs are listed), Tape B went from an average of 18.8% of total share volume in 2019. To an average of 18.7% in Jan, to 20.1 in Feb, 24.5% in Mar, and back down to 21.3% in April (through the 29th). So, what that isn’t conclusive, its a pretty strong causation. During that time the high vix averages were 16.4% for 2019, 15% in jan, 21.1% in Feb, 64.7% in Mar, and down to 44.2% in April.

    And anecdotally it makes sense too given during bouts of volatility – folks have a better view of macro direction than want can happen with any individual name. Hope this helps. Larry

  2. Damian Hoult

    April 28, 2020

    Larry, is the huge spike in US equities traded (Covid-19 vs GFC) reflecting, in part at least, the meteoric rise of ETF’s?