European Equities Market Microstructure – September 2020 SnapshotRobin
by Richard Hills, big xyt
In this post we summarise 2020 volumes and market fragmentation up to the end of August. We note that volumes have decreased dramatically to produce the two quietest months of the MiFID2 era. The data is taken from our Liquidity Cockpit tool which provides the detail at index, country and stock level for over 17,000 ISINs and not just on volumes and fragmentation but many metrics such as spreads, book depth and quote presence.
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- Annualised 2020 volumes v 2019 were up 36% in Q1 but the increase has slowed to 15%.
- ADVT€ was 74B in Q1 v 54B in 2019. This has fallen 42% to 43B in Q3.
- Q2 market volumes were in line with historical Q2 average levels.
- July and August volumes were the lowest in the period from January 2018.
- Despite the turbulence, there is little change in the distribution of volumes between trading venue types from 2019 to 2020.
- On Order book trading is 67.9% of overall volumes, up 0.9% since 2019 and clawing back 1% of the 3% lost since 2018.
- Lit Continuous order book trading has recaptured 1.5% market share in 2020 to reach 44.8%, having lost 6% between 2018 and 2019 to Dark pools, Closing Auctions and Systematic Internalisation.
- For the first time in many years, the growing trend towards Closing Auctions has abated, with a 3% reduction since Q4 2019. Auctions are around 17% of market volumes.
- Meanwhile, equity market spreads continue at raised levels (+50% on UK100 v September 2019), reflecting on going volatility.
European Equity Market Volumes
In general, market volumes follow a consistent monthly pattern, driven by regular events such as dividend season, index re-weightings and expiries. Macro events disrupt that pattern; from a three-year baseline of 58B€ a day, Q1 jumped to 74B€ with a record month of 96B€ in March. While April captured the tail end of the great sell off, May was rescued by a very active MSCI re-shuffle on the 29th, featuring a bumper index day of 104B€, as the world adjusted to some impressive changes in weightings.
Further Covid inspired volatility in June triggered a 13% increase to 68B€ ADVT, with another bumper day of 106B€ in the middle of the month. Moving into the summer, both July and August set new MiFID2 era lows for volumes, with August being the only month to sink below the 40B€ ADVT mark in 32 months, a level typical of the Christmas holidays.
In the 11 quarters since January 2020, there have been 20 days in which the European equity market has punched through the 100B€ day threshold. Twelve of these were in the 17 trading days between February 27th and March 20th 2020, and there was one day each in May and June. The period record was February 28th, with 133B€.
European Equity Market Fragmentation
In the 11 quarters since MiFID2 began, Order Book market share has ranged between 67% and 70% of the overall market annually, with a quarterly range from 64% to 72%. On Order Book trading has lost 2% market share to Off Order Book trading since 2018. At the end of 2019, this was 3% and has recovered slightly this year.
- Lit order book ‘continuous’ trading, the basis of price formation, fell 6% from 49.7% in 2018 to 43.9% in 2019, recovering only 0.9% in 2020 to 44.8%.
- The trend for volumes to shift away from Lit Continuous trading to the Closing Auctions, Dark Pools and Systematic Internalisers has somewhat abated this year. Indeed we normally see market share moving to these venues type when volumes are low, but Q3 seems to have bucked this trend.
A surprising feature of 2020 is that despite very high levels of passive trading activity, including a record MSCI rebalance in May, the Closing Auctions lost market share to Lit Continuous trading, for the first time in several years.
European Equity Market Quality – Spreads
There was a dramatic increase (>2.5x) in spreads on all indexes at the start of the year, versus a benchmark of September 2019, reflecting the crisis. Despite a steady decrease since April, spreads have not normalised to pre-crisis levels. At the end of August, DE30 average spreads remain 11% higher than at the beginning of September 2019, FR40 remain 16% higher and UK100 48% higher.
Definitions Used in this Post
- Overall Market Volumes include all Exchange and MTF based On Order Book trading, Systematic Internalisation and OTC-Negotiated Trades (manually arranged, non-electronic trades). Other OTC categories are excluded.
- On Order Book trading consists of Lit Continuous (intraday electronic trading on Exchanges and MTFs), Dark Continuous trading and Auctions.
- Auctions include Open, Closing, Intraday (e.g. lunchtime auctions), Periodic Auctions and ‘Other’ such as those following trading halts.
- ADVT is calculated as total volumes traded for the month divided by business days, with most exchange holidays excluded.
- Scope of data includes most European large, medium and small cap indexes and European ISINs. ETFs, GDRs and alternative investment markets are not included.
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