Responding to the sell-off in US markets and how traders are dealing with increasingly unpredictable liquidity (particularly as a result of increased retail trading participation), Jeff O’Connor, Head of Market Structure, Americas, for Liquidnet, said:

 “As equity markets have ebbed, the retail component drops accordingly. Finra TRF reported volumes reaching as high as 47% of total market volumes at times in August is a direct result of higher Single Dealer Platform internalization of retail order flow, along with some meme situations where volume in anyone name could be as much as 2% of total market volumes. Liquidity becomes just as unpredictable as the market turns negative, the severe market headwinds keep traditional institutional portfolio managers and traders cautious, and the quant/systematic funds start to take advantage of a favorable factor-based environment. In the case of recent trends, the sourcing of market volumes has not been traditional institutional liquidity, and that brings another layer of complexity to trading desks in already challenging circumstances”

 “Traditional active portfolio managers and traders trade around bands of volatility in their names. When the source of market volumes swings so quickly from retail-heavy participation (market moving higher) to systematic/quant participation (market turns down), the real price volatility can be exacerbated by what is uncertain or unstable liquidity in the marketplace. While the bands of volatility provide attractive entry points for traders, taking advantage of sentiment or micro-structure signals that can show exceptional signals for a stock, correlations remain extremely high. In the type of environment where all stocks move so highly in lockstep, the lack of institutional stock-picker participation hurts the depth of book and hurts trading costs”

Source: Liquidnet