High-frequency traders might have just left the building.
Speedy traders, who account for as much as 50 percent to 60 percent of U.S. equity trading volume, might be looking elsewhere, as bid-ask spreads have begun to widen despite falling volatility, according to data tracked by Credit Suisse.
While it has been no secret that institutional investors have not been fans of U.S equities due to the confluence of European debt concerns, a sluggish U.S. economy and the Presidential election, the lack of HFT presence in the market is new.
According to Tabb, HFT activity in the equities market has increased from zero to today’s 50 percent to 60 percent of the market over the last several years. Credit Suisse has monitored bid-ask spreads and volatility over the same time, bid-ask spreads have mostly tracked volatility, spiking in the credit crisis, and falling as the VIX fell. At the same time though, spreads have also compressed — they are now lower that at previous times with the same level of volatility.
But in the past 2 months, studies by the broker have pointed to a divergence between spreads and volatility. Spreads are widening, but volatility is not moving in kind. (See Chart)
“Normally when bid-ask spreads widen, volatility has increased, but not now,” said Phil Mackintosh, global head of trading strategy at Credit Suisse. “There’s a disconnect on movement and direction, it’s the first time we’ve seen it.”
That is of concern. Why? Normally when bid/ask spreads widen trading costs go up too, he added.
With macro fear remaining high, Mackintosh said there has been less incentive for institutional investors to trade. And as a result, HFTs, who are the contra party to many institutional trades, have had less trading to do too.
“With institutional flow down, HFTs consequently are less involved.”
Mackintosh added that spreads haven’t shown any signs of gapping, but they are indeed drifting wider and bear watching as volatility has stayed low.
