Assessing Market Liquidity
By Charles Hebert, Global Head of Trading Research, Invesco
- Our teams observe that liquidity access has been exceptionally challenging in credit markets across the globe, particularly in Emerging Markets, but we believe Invesco’s experienced traders have been able to leverage our global size and scale across key counterparty relationships to access liquidity that may not have been available to other investors.
- Looking towards derivatives, we expect the closing of the Chicago Board Options Exchange’s (CBOE) and Chicago Mercantile Exchange’s (CME) open outcry trading floors at their close on Friday, March 13, 2020, to materially impact pricing and liquidity, starting this week. In our view, the CBOE floor closure is most significant, as we believe it will impact pricing and liquidity for all equity options and all financial instruments with a volatility component. The CBOE floor traders have historically served as a major conduit for banks, and the market as a whole, to share and hedge options risk. Therefore, we believe the closure will broadly impact the whole of the equity derivatives landscape.
- Futures liquidity has thinned significantly over the past two weeks as volatility has increased, with spreads widening and average quote sizes decreasing. Quoted size in E-mini S&P futures (the world’s most liquid equity contract) has dropped by 87%-90% and average bid/ask spreads have widened by approximately 17%.
- Overall global cash equities volumes remain elevated, approximately 25%-30% above average. Equities liquidity is widely accessible in aggregate, but counterparties have significantly scaled back principal risk facilitation. Market makers were particularly slow to price ETFs on Monday, March 9.
- Commodity & equity volumes are high and assets are trading, however, what’s most noticeable is the decline of liquidity at the top of the order book (the most competitive bid and offer that sets the prevailing market price). In certain products, the average available trade sizes and market depth are some of the lowest we’ve seen in recent years. Because of the lack of depth, it may be necessary for traders to cross multiple price levels to complete an order.
- We observe that equity closing auctions have continued to be orderly for the most part. We have noticed a handful of recent closing auctions at which prices moved more than they typically would in normal market conditions, a development we would attribute to the increase in volatility driving market participants to avoid carrying positions on their books overnight.
- In our view, commodity market settlement windows continue to remain orderly, as these instruments use a time and formulaic approach to volume over a specific period to determine the official close.
- We applaud the S&P Dow Jones Indices’ decision to postpone the S&P quarterly rebalances that were scheduled for March 20th. In an effort to protect our shareholders, Invesco proactively engaged S&P, FTSE & NASDAQ on Thursday, March 12 to encourage them to consider postponing index events during these extremely volatile times. At the time of this writing, S&P did not anticipate implementing the postponed changes prior to the open of Monday, April 27.
- Invesco’s ETF flows have been primarily into and out of Invesco QQQ ETF. In years past, during volatile times, we saw more tactical rotations into and out of different factor products (low volatility/value/growth/momentum/equal weight). We are not seeing similar rotations at this time. We observe that asset correlations are high across different types of products and that is not normal in our view.
- Overall, recent volatility has had a significant impact across markets and asset classes, but we believe Invesco’s global trading team continues to successfully leverage our vast experience, expertise, toolkit, scale and deep relationships to successfully navigate the rapidly changing market landscape in a way that, we think, will have minimal impact to our clients
Unless otherwise stated, the source of all data is the Invesco trading team, as of 3/16/2020
The bid/ask spread is the difference between the price at which a seller is willing to offer a security and the price at which a buyer is willing to purchase it.
Correlation is a statistic that measures the degree to which two variables move in relation to each other.
E-mini is an electronically traded futures contract that is a fraction of the value of a corresponding standard futures contract. E-mini’s are predominantly traded on the Chicago Mercantile Exchange (CME) and are available on a wide range of indexes, commodities, and currencies.
The settlement window is how the official daily closing price of futures and options on futures contracts is determined. This price is used by the Exchange and Clearing House for marking all open positions at the close of the daily settlement cycle.
The opinions referenced above are those of the author as of March 17, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
Investors should consult a financial professional before making any decisions. Shares of ETFs are not individually redeemable and owners of the Shares may acquire those Shares from the fund and tender those shares for redemption from the fund in Creation Unit aggregations only, typically consisting of 10,000, 50,000, 75,000, 80,000, 100,000, 150,000, or 200,000 shares.
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