Including a Look at On vs. Off Exchange Trading

Key Takeaways

• While markets remained opening and functioning, all has not been perfect
• Off-exchange trading market share remains elevated, ~42% from April to June vs. 37.3% in 2019
• As the only exchange group with a hybrid model, the NYSE floor closure did appear to have an impact – market share declined temporarily, reversed trend in June
• COVID-19 volatility impacting market quality: avg. daily dollars at NBBO -26% vs. avg. spread +53%

Background

The emergence of the global pandemic COVID-19 in the first quarter of 2020 caused severe economic and capital markets shocks, as evidenced by sharp price declines, yet spikes in volumes, in equities markets. The ultimate symbol of these unprecedented times was the closing of the floor of the New York Stock Exchange (NYSE, a subsidiary of Intercontinental Exchange/ICE) on March 23. As a reminder, NYSE is the only U.S. cash equities exchange that runs a hybrid model – electronic and human interaction, mainly at the open and close – on two of its exchanges (NYSE and American). Its competitors are all electronic.

In May, we published a note analyzing a question on the minds of market participants – was the floor closing causing NYSE to lose market share in equity trading? In that note, we analyzed market share movements from January 2 through April 29. While we discovered NYSE’s numbers had worsened in April, it was not to a significant degree: overall January 2 to April 29 share was down 1.6 pps, but the numbers fluctuated weekly throughout the time period and other exchanges also saw periods of declines (and swings) throughout the analysis period. We concluded that we must wait and see if there will be long-term impacts on NYSE’s market share.

NYSE partially reopened it trading floor on May 26, bringing back ~80 floor brokers, or 25% of the total, but not bringing back designated market makers initially (a subset returned on June 17). With over a month of trading now in the books, we analyze any changes since our last analysis and overall trends for the first half of the year, looking at the time period from January 2 to June 30. For this analysis, we note the following about dates chosen:

• March 16 = Monday of the last week the floor was opened and prior to the public announcement of the closing (March 18), to avoid any noise from the announcement
• March 20 = last day prior to the close
• March 23 = first day of the closure
• April 29 = last trading day from our prior analysis
• May 26 = partial reopening day
• June 30 = last trading day of this analysis

Executive Summary

As we have been writing in our COVID-19 impact research, while markets remained opening and functioning, all has not been perfect. As the only exchange group with a hybrid model (on two of its exchanges), the floor closure did appear to have an impact, as its market share did decline at least temporarily. NYSE was not the only exchange group to lose share, as some share shifted across exchanges while other volumes moved off exchange. NYSE’s market share decline reversed in June, once the floor reopened.

• January avg off-exchange share 39.9% vs. 37.3% in 2019 (+2.6 pps); normalized into March, then moved off exchange stayed there (1Q20 37.6% vs. 2Q20 41.8%, ~42% in April-June)
• Some attribute this to retail traders, as <$5 stock volumes + 282% vs. S&P 500 stocks >$5 +94% (Oct ‘19-Jun ‘20); off-exchange share in low-priced stocks historically greater than overall market
• NYSE 2Q20 market share 21.8%, -2.2 pps to 2019 & -2.5 pps Q/Q; Nasdaq -1.3 pps & -0.3 pps, Cboe -0.3 pps & -0.7 pps, IEX -0.7 pps for both; vs. on-exchange trading -4.5 pps & -4.2 pps
• NYSE 1H20 market share 22.9%, -1.9 pps from the start of the year; Nasdaq -2.2 pps, Cboe -0.3 pps, IEX -0.2 pps; vs. on-exchange trading -4.7 pps
• NYSE June average market share -1.7 pps from January average; Nasdaq +1.4 pps, Cboe -1.0 pps, IEX -0.7 pps; vs. on-exchange trading -2.0 pps
• NYSE May average to June average market share +0.2 pps M/M; Nasdaq +1.5 pps, Cboe -1.6 pps, IEX -0.2 pps; vs. on-exchange trading flat
• The reversing trend (date vs. start of the year)
• April 29: -4.1 pps (Nasdaq -2.3 pps, Cboe -0.6 pps, IEX, -0.5 pps; on-exchange -7.5 pps)
• May 26: -2.8 pps (Nasdaq -3.1 pps, Cboe -0.1 pps, IEX, -0.5 pps; on-exchange -6.5 pps)
• June 30: -1.7 pps (Nasdaq -0.4 pps, Cboe -2.0 pps, IEX, -0.7 pps; on-exchange -4.8 pps)
• June 30 to May 26: +1.1 pps (Nasdaq +2.8 pps, Cboe -1.9 pps, IEX -0.2 pps; on-exchange +1.7 pps)
• On May 26, D orders 19.1% of NYSE closing auction (not available under the close); down from 32.9% avg. but >50% of this level despite having 1/4 floor brokers on the floor (& no DMMs); opening auction saw 5% less price dislocation (opening price vs. next 5-minutes volume weighted avg. price/VWAP) vs. prior week
• COVID-19 volatility worsened displayed market quality indicators, despite the increase in volumes: volumes in <$5 stocks +180% vs +75% for S&P 500 stocks >$5.; avg. daily dollars at NBBO -26% vs. avg. spread +53% (wider spreads increase trade cost)

 

 

Author

SIFMA Insights
Katie Kolchin, CFA
Director of Research

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