Citadel Securities, NYSE See ‘extreme events’ becoming routine for markets

(Bloomberg) — It will take more than Omicron to get US exchanges and market makers out of their game.

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Michael Blueground, chief operating officer of the New York Stock Exchange, said he woke up the day after Thanksgiving to signs that a new alternative to Covid-19 was upsetting US markets. Still, he was confident the New York Stock Exchange could handle the crisis, having spent the past 18 months watching markets swayed by the pandemic.

“What was once unimaginable in terms of the needs of the system has become a regularity,” Blaugrounds said in an interview. “Technology will continue to grow and retool – it’s important that markets work predictably.”

The Cboe Volatility Index, a measure of the market’s ups and downs, is approaching its highest level since January. More signs of turmoil: The S&P 500 fell 2.3% on Friday, jumped 1.3% on Monday, and then fell 1.9% on Tuesday. The 10-year Treasury yield fell to 1.4% from 1.67% before the holiday, and WTI fell more than 16%.

While the fluctuations are not unusual, the level of convulsions, especially at the beginning of the epidemic, was severe. The decline in US stocks led to the imposition of trading restrictions known as circuit breakers on several days in March 2020. Added to the market spasms, the pandemic-induced shutdown and the emergence of commission-free trading platforms.

“We’ve been through several extreme events over the past two years,” said Joe Mikani, Head of Execution Services at Citadel Securities. “Days like this become normal despite the fact that the headlines are causing some shock to the system,” he said, referring to the day after Thanksgiving.

It’s also an indication of the market’s resilience in the face of increased volatility, he said, noting that the US stock market has traded an average of about 9 billion to 10 billion shares a day since the first quarter. He said Monday, as markets braced for a renewed period of uncertainty, $11 billion.

Of course, volatility can lead to boom times for companies like Citadel Securities, a market maker that provides liquidity trading execution to institutional and individual clients. The company, founded by Ken Griffin, reported $6.7 billion in net trading revenue in 2020, nearly double the previous high in 2018.

“As investors and asset managers work to pick winners, market makers are working to sell instant liquidity,” Larry Tap, an analyst at Bloomberg Intelligence, said in an interview. In more volatile periods, supply and demand spreads widen, which increases the price of liquidity, and translates into higher returns for these companies.

Tapp writes in a report that increased volatility could shift more trading to exchanges such as the Nasdaq, and make matching orders on the exchange, or so-called dark pool, more difficult.

Ronan Ryan, President and Co-Founder of IEX Group Inc. , the stock exchange operator made famous by Michael Lewis’ “Flash Boys,” is sipping cocktails on a catamaran in the British Virgin Islands as he begins grappling with the volatile post-holiday market.

“The exchanges have proven that we have managed events correctly,” Ryan said. He said that any concern about dealing with volume surges has dissipated given the level of volatility and testing over the past 18 months.

However, Friday’s market volatility was a bit of a surprise considering that day is usually “dead as a chamomile,” he said. “A lot of people have gotten over their Thanksgiving hangover and started trading.”

Before the pandemic, the IEX was handling about 1 billion “messages” per day, which included orders and deals. The new normal is between 2 billion and 3 billion, and Friday’s level was 2.5 billion, Ryan said, adding that the IEX saw a record number of retail brokers participating that day even though it was a half-day session.

It was also the fourth busiest day for IEX retail volume since the exchange operator implemented changes to that program in October.

Adding to volatility are ongoing concerns about supply chain shortages, inflation and rising interest rates – just as more retail investors have entered the market chasing volatility.

“This has been a total shift in the overall retail experience,” said Reggie Brown, who manages the ETF market at GTS Securities, an electronic market maker. His colleague Joe Belfner, who runs the wholesale and retail industry at GTS, sees it going.

“As much as they have been active, they will continue to be active,” Belfner said. ‘Retail cannot stay away from commerce.’

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