COVID-19 Volatility Affects Course Of Fast-Changing U.S. Market Structure


New Exchanges, New Regulations and Other Changes Impacted by Pandemic

Tuesday, July 21, 2020 Stamford, CT USA — Volatility in global financial markets could be altering the trajectory of the ongoing transformation of U.S. equity market structure. 

Coming into 2020, U.S. equity market structure was in the midst of change. Three new stock exchanges had announced their planned entrances and a host of regulatory actions loomed on the horizon, including new order-routing disclosures, a delayed Transaction Fee Pilot, potential changes to unlisted trading privileges, and a proposed overhaul of the securities information processors (SIPs) for market data. 

Meanwhile, traders were becoming more reliant than ever on algorithms for execution and broker dark pools for liquidity, and brokers were increasingly competing for order flow on the basis of the service quality on “low-touch” electronic trades. 

The onset of the COVID-19 crisis upended many plans and influenced the pace and possibly the direction of this evolution. A new Greenwich Report, U.S. Equity Electronic Trading: A Look Back at 2019 and Into 2020, identifies the transformational trends playing out in U.S. equity market structure at the start of the year, and examines how the COVID-19 crisis has affected them. 

Exchanges Losing Trading Volume

The closing of the NYSE trading floor due to COVID-19 restrictions on March 23 temporarily eliminated floor brokerage volumes and stopped the ability to submit D-orders. The global pandemic delayed the opening of at least one new exchange entrant, MEMX, and has called into question the scheduled launches of MIAX PEARL Equities and the Long-Term Stock Exchange (LTSE). More broadly, the crisis also triggered a major shift in U.S. equity trading volumes away from exchanges. 

In 2019, off-exchange trading reported to the Trade Reporting Facility (TRF) remained relatively stable, hovering mostly between 35% and 40%. In all of 2019, there were 16 days with TRF volume above 40%. In contrast, as of early June 2020, the reporting to the TRF had already exceeded 40% of market volume 58 times.

“Standard market analysis would say that in such volatile times there would be a flight to the stability of the lit exchanges, and initially, this did indeed occur,” says Shane Swanson, Senior Analyst for Greenwich Associates Market Structure and Technology, and author of the new report.  “However, as the U.S. equities marketplace proved its overall resilience, off-exchange volume not only rebounded, but expanded.”

One possible reason for this increase in off-exchange volume is the role of retail trading and market makers. Whether or not the markets snap back into their respective pre-COVID market shares remains to be seen. What’s clear, however, is that with proper systems, risk hedging and management, some market makers appear to have been able to internalize more trades with the retail market, resulting in the increase in market share moving away from the exchanges. At the same time, as volatility skyrocketed, firms may have decided that dark trading was important to help prevent signaling to a market already in distress.Amid all these shifts, the one certainty is that there is more change to come. As Shane Swanson says, “With massive proposed changes to market data infrastructure on the SIPs, new exchange entrants eager to prove their value, and, of course, the coronavirus itself, the most certain bet is that 2020 will be one for the books.”