It used to be that equities only traded on exchanges such as NYSE and Nasdaq, between the hours of 9:30 am and 4:00 pm New York time.
That changed as alternative trading systems gained traction over the past 20 years, and it stands to evolve further as overnight trading advances.
The two non-traditional liquidity sources were discussed Wednesday afternoon at the Security Traders Association’s annual market structure conference in Washington, DC.
Off-exchange trading now comprises about half of US equity volumes. In a panel entitled Off-Exchange Trading and Non-Bank Liquidity: The Face of Market Depth, panelists from trading venues and electronic liquidity providers noted that the landscape has changed in terms of the number of liquidity providers, the types of liquidity being offered, and the level of market complexity.
Large language models, a subset of AI, are democratizing brokers’ capacity to analyze liquidity patterns and navigate market structure, and that trend will gain momentum over the next couple years as the technology spreads through the industry. That will be a tailwind for so-called dark liquidity as market participants can better assess its value, it was stated.
To the question of what off-exchange liquidity will look like in five years, it was stated that there will be more bilateral and customized liquidity, and it’s possible that cheaper liquidity overall will increase trading volumes. AI’s capabilities are “stunning” today and it’s impossible to predict what they will be in five years’ time.
Earlier on Thursday, Jamie Selway, Director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission, addressed the recently approved Innovation Exemption, which allows the on-chain trading of tokenized National Market System (NMS) stocks.
“’Innovation without arbitrage’ remains our watchword,” Selway said at STA. “I believe that a five-year, conditional exemption from the definition of ‘exchange’ for Tokenized Securities Venues, or TSVs, that provide the use of automated market makers for permissioned participants to trade tokenized NMS stocks is a responsible step forward.”
The off-exchange liquidity panel noted that there may be five to ten firms filing to be TSVs, but the question is how many will survive, and the main theme to watch is how the tokenized market ecosystem evolved and interacts alongside traditional equity market structure.
The subsequent panel was The Always-On Market: Liquidity, Volatility, and the Future of 24/7 Trading.
That panel that overnight trading is rapidly growing and becoming more competitive and robust, with more order types, more functionality, and more participation. Overnight trading is averaging about $4.5 billion per session, with 105 million executable shares – but it’s still only about 1% of overall U.S. equity trading.
The next leg up will be on the evening of Sunday, December 6, when five U.S. stock exchanges — Nasdaq, NYSE Arca, Cboe EDGX, MEMX, and 24X — are scheduled to kick off extended overnight sessions, with the Securities Information Processor providing market data. The NYSE and Nasdaq brand names will attract traders to the overnight session, and the SIP will distribute data at scale in a way that overnight trading now lacks, the panel noted.
Some aspects of overnight trading, such as the static 20% price boundary above and below key reference prices to limit price swings, will need to be ironed out, and ultimately, success in overnight trading will mean trading that looks like, and is harmonized with, trading in the core daytime session.
