Trading volumes on European equity markets are exploding. In the first two months of the year, stock exchanges broke records for average daily trading volumes (ADV) set during the Covid-19 crisis. This March is set to be the “busiest” on record with almost 100 billion euros in trade per day, 80% above the four-year average of 55 billion, according to the pan-European platform. Cboe or the analysis company Big Xyt.
And volumes could still increase, but without the market structure necessarily improving if all the flows are concentrated at the same time and/or in the same direction. “Market liquidity can disappear very quickly, but, except in Russia of course, the current situation is not comparable to that of the Covid crisis in March-April 2020 when there was a complete drying up of the liquiditysays a specialist. During the day, we can see points of illiquidity because many investors act in the same direction: this generates greater volatility during certain phases of stress, with indeed a concentration at the opening fixings and especially closing, but this phenomenon of concentration (essentially on large caps) is not new or directly linked to the conflict.”
The Euronext platform may see a drop in liquidity in certain market circumstances since the invasion of Russia, but not in worrying proportions. “For example, the increase in the share of auctions is not greater: the volumes of these auctions (of which the closing auction represents 95%) increased by 45%, from 2.9 to 4.2 billion euros. euros on average per day on Euronext (excluding Borsa Italiana), while trading volumes in continuous session increased by 50%, from 6.5 to 9.8 billion euros on average per day”, notes Simon Gallagher, equity/derivatives director at Euronext. On other platforms, the share of auctions even fell for the first time since March 2020, from 29% to 25% of volumes according to Big Xyt, as traders become more eager to find a price when volatility increases.
“Generally, when volatility is higher, the average order size tends to decrease. But the impact here is not significant: stable around 4,700 euros in the continuous phase, up from 33,000 to 40,000 euros in the auction phasecontinues Simon Gallagher. If we look at the quality of the market, the average ‘spread’ between the price offered and the price asked on an index like the CAC 40 has gone from 3.5 basis points (bp) before the crisis to 4.5 bp. In the spring of 2020, “bid-ask spreads” had reached a peak of 12 bps and an average of 6-8 bps in Europe according to regulators.
This point remains to be monitored, because between the war in Ukraine, sanctions and political risks, volatility should at least continue. The European equity volatility index (VStoxx) has risen around 35 points since February 24 – and even reached 50 on March 4 with the bombardment of the Zaporijjia nuclear power plant – without falling too much. Unlike the American Vix index, which fluctuated around 26 points on Friday.
Bonds without price?
The situation is hardly any simpler for bonds, even if the war has in the end only slightly modified the tendency to sell linked to the rise in interest rates. “These markets remain over-the-counter (OTC) for the most part, and the drop in liquidity is more structural with banks allocating less capital to carrying securities. This poses little problem in normal times because the ‘market-makers’ are still present, but more during episodes of stress., recalls Steve Mosseri, rate negotiation manager at Exoé. Despite connections to all the “request for quote” (RFQ) and “dark-pools” platforms of this execution table dedicated to management companies, he also had difficulty finding prices on Russian bonds, sovereign or companies, for sellers from the beginning of March.
With the war, Steve Mosseri noticed price discrepancies on rates despite the presence of market makers, and far fewer direct orders on credit bonds: “Investors are using more listed index funds (ETFs, Exchange traded funds) and credit derivatives (CDS), which allow them to position themselves and hedge faster than by buying live securities.continues the professional. The end of the central bank’s asset purchases should lead to a normalization of the bond market, and we hope that investors with longer durations will come in after a phase of ‘short duration credit’. We work a lot with banks and ‘sell-side’ traders to offer our clients a global and real-time view of prices”. Even if those displayed are rarely those that are executed in these stressful times, concludes Steve Mosseri.