Automation Eats the World of Trading
The cost to trade the average US large cap stock has trended around its base level since mid-May this year.
Source: Liquidnet Investment Analytics
Elevated spread during the rotation to value and growth after the release of vaccines had caused the cost to trade to rise for a number of months.
Source: Liquidnet Investment Analytics
The number of shares traded between the auctions in the average large cap name has changed little over the past year.
Source: Liquidnet Investment Analytics
Over this period the sum of the shares on top of the book has declined steadily.
Source: Liquidnet Investment Analytics
The price paid for narrower spreads is lower level one liquidity in lit markets. These two factors offset each other and leave the cost to trade stable in an environment of consistent traded volume.
This is automated trading at higher speeds and lower lot sizes in action. The cost to trade rose when greater urgency was introduced during the Great Rotation, but fell back when the dominant trend of the passive bid at low volatility was restored in late spring and summer.
Source: Liquidnet Investment Analytics
Outside of expiries, volume in the closing auction is stable.
Source: Liquidnet Investment Analytics
This is also the case for the opening auction.
Source: Liquidnet Investment Analytics
Automation in lit markets is driving down spreads at the expense of liquidity on the top of the book. Larger child orders reflecting higher urgency, as in the November 2020 through March 2021 period, tend to increase the cost to trade. Active fund managers may be fighting to keep pace with passive fund performance, but active traders are equally fighting to find liquidity in a world of increasingly automated trading.
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Written by Simon Maughan, Head of Trading Alpha
All analytics shown are as of the close on September 27, 2021