Commenting on the difficult trading conditions and challenges traders are facing as the equities market becomes desensitized to heightened volatility, Jeff O’Connor, Head of Market Structure, Americas, for Liquidnet, said: “As earning season gets underway, trading desks are facing once in a generation headwinds as economic conditions tighten. Traders are not only having to contend with heightened risk but also difficult markets that are not behaving as they have done in the past. The VIX for example, sitting at high levels, but not triggering the type of historical reaction to 3%+ moves in the major equity indexes. The market has become accustomed to the real price volatility, almost desensitized to it. And the wild moves are making trading conditions that much more difficult.
“Quant funds and traditional electronic market makers, or high frequency, have enjoyed the quickly shifting conditions this year. Much of the volume has relocated to these sources, exacerbating the lack of real institutional flow – making individual stock trading that much more difficult. With realized correlations at extreme levels, coupled with the difficult trading conditions, traditional money managers are sitting on historic levels of cash. ETF’s pushing to as much as 40% of total equity flows at times, speaks to that avenue as an easier way to make a macro call in a single-stock. Liquidity is falling, in particular, executable institutional volume, and with that the cost to trade increases significantly. Hence the recurring cycle of elevated cash positioning.
“The macro backdrop will have to change significantly for traditional money managers to move out of their shelters. But with this much cash on the sidelines, when inflation and interest rate peaks start to signal a peak, the move back into markets could be explosive.”
