The big xyt Microbites series is for those who are unfamiliar with the European market structure or need a refresher. In this third episode we look at dark trading in Europe and the unique rules that limit the activity. We recommend that you read the previous episodes if you are unfamiliar with any of the terms used here. View the article
In our second episode on the European market structure landscape, we describe the grandly named “Multilateral Trading Facilities” (MTFs) and compare them to the better known national stock exchanges.
In 2020, we took to trading from our bedrooms, garden sheds and conservatories, learned how to download several hundred video conferencing packages, set up a home-school on the kitchen table, and went to work in our pyjamas. As we couldn’t go out on New Year’s Eve to watch the fireworks, we stayed in and prepared our 2020 survey of European equity market volumes and other statistics.
It’s been a turbulent year for the airlines, and just as the arrival of vaccines seemed to clear away some of the clouds, they’ve been hit by a blizzard of travel restrictions. In today’s 12 Days of Trading post we look at easyJet, a UK travel sector mid cap stock, as an example of how liquidity analysis can inform trading tactics during times of volatility. easyJet’s shares seemed to be on a smooth climb out just a few weeks ago before suffering a 13% price drop over the weekend, most of which has been recovered at the time of writing.
It would be remiss of us not to comment on some observations on market quality as a result of the macro surprises experienced this year. There was a lovely correlation between volatility/uncertainty and market quality during 2020. “Lovely” to behold, but unfortunately, expensive for many end investors. It would seem that the market is intended to be fair to all participants but some thrive more in choppy seas. We see the first evidence of this in Exhibit A today.
As it’s nearly Christmas, it will soon be time to wrap up the volumes-related theme we have been following these first few episodes of the 12 Days of Trading. First though, let’s take a look at how the monsters of European trading fared in 2020. The first chart was inspired by looking at my Christmas tree lights, shortly after I hauled them out of the box under the stairs. It shows the ‘Big Five’ of the share trading world in Europe – SAP, Roche, Unilever, Nestle and Shell; between them they make up around 6% of daily traded value of the whole European equity market. With their large index and sector weightings, these blue chips are the mainstays of so many ETFs, passive trackers and mutual funds, and when their prices become volatile, they can deliver some really big days.
For traders and portfolio managers who are navigating the European market structure landscape or want a refresher, big xyt is introducing a series of briefings to help you get to grips with the market mechanisms, and to help users of our analytics tools.
Market data can provide valuable context to the narrative by drawing direct, quantifiable sector and index parallels. In this example, daily trading volumes have dropped by an average of 57% since Q1, and in a tightly banded range, it shows how the whole sector has been uniformly impacted. Following the heavy rotation out of equities during the great Q1 sell-off, Q3 volumes reached unprecedentedly low levels in these big names (Equinor, Repsol, Eni, BP, Total and Royal Dutch Shell), as seen in most sectors. Reversal of this trend may be a clear signal that recovery is coming.
It hasn’t been a good quarter for the European Equity Market. In nearly every country, we’ve seen record lows for volumes throughout the summer. August delivered the slowest month for trading since the MiFID2 era began in January 2018 and the pattern persisted into September. Although 2020 remains ahead of 2019 in terms of daily turnover, the lead has diminished substantially from 34% in Q1 to 11% in Q3 and may evaporate completely in Q4. You can download the full report by clicking on the icons or clicking here.
Having a good understanding of how to select a venue when executing a large trade is essential for successful performance. There are many venues to consider and each venue has its own “sweet spot”, depending on the names and size traded and that varies according to your level of urgency. Using objective criteria, such as expected time to execution and likely price impact, we can rank venues into an order of priority for routing. Furthermore, when we look at how this changes over time, we get a sense of the importance of regular monitoring and updating of the smart order routing process.
