Tariffs and turmoil: Rising volatility and the true cost of trading in Europe
The trading landscape in Europe is undergoing a dramatic shift. As market participants brace for further developments, the cost of trading is climbing sharply, reshaping liquidity conditions and prompting a rethink of risk and exposure across European large caps.
A costly trading environment
The recent imposition of US tariffs on European goods have led to a heightened volatility environment in the markets. In a period already filled with uncertainty, the magnitude of the reciprocal tariffs released on April 2nd surpassed market estimates and triggered a large sell-off in equities, as investors digested its impact on company earnings and the economy.
Figure 1: Volatility of UK, French and German large caps increased by ~48% the day after Liberation day, and continued to rise by another 60% the day after.
Source: BMLL and Liquidnet internal data
The lack of clarity around how President Trump will handle tariffs moving forward is a major driver of this volatility. Questions about whether there will be exceptions for certain companies, or if there will be further escalations or retaliations from other countries, create investor uncertainty and this has a significant impact on the market microstructure and cost of trading.
Figure 2: Best bid-offer touch sizes across large capitalisation stocks in UK, France and Germany.
Source: BMLL and Liquidnet internal data
Initially, the increase in touch sizes at the start of Q1 suggested investor conviction in European equities, perhaps driven by a mix of optimism in the region as investors seeking value rotated into Europe, as well as by those who sought to derisk their exposure at elevated price levels ahead of looming uncertainty.
The situation started to reverse sharply following Trump's tariff announcements, and BBO touch sizes began to fall as investors reassessed their outlook on Europe due to the growing uncertainty around global trade. Friday saw touch sizes decline by over 25% from Liberation day (see figure 2).
Figure 3: Bid-Ask spreads saw a 7% rise post Liberation day, and over a 20% rise on Friday. Market makers and liquidity providers widen spreads to account for the higher risk of holding positions in an unpredictable environment.
Source: BMLL and Liquidnet internal data
Figure 4: Market impact cost estimates based on a 5% ADV basket of large cap stocks (bps).
Source: BMLL and Liquidnet internal data
Higher spreads and lower touch sizes are usual observations during periods of high volatility. Figure 4 solidifies the expected higher costs of trading, where the Market Impact cost estimates have shown an increase of over 53% since Liberation day. In such environments, block liquidity stands out as a significant source of cost saving.
European volumes: A changing dynamic
The shift in European equity markets, with volumes rising to EUR 71B in March 2025, is particularly noteworthy. This increase marks a significant departure from the decade-long trend of declining trading volumes, suggesting that European investors may be reacting to these geopolitical shifts by adjusting their portfolios. The increase in trading volumes commenced in Q4 last year, and accelerated into Q1 this year. March volumes were15% higher than February, 43% higher than January, and 59% above the 2024 average. Coupled with the larger touch sizes pre-tariff announcement, may suggest that this surge in liquidity could be sustained past the current market turmoil.
Figure 5 below compares these volumes with the volume surges experienced with higher volatility post Liberation day.
Figure 5: European average daily notional traded. Addressable liquidity ex OTC/off-book.
Source: BMLL and Liquidnet internal data
Given the interconnectedness of global markets, it will be interesting to see how the European Liquidity Landscape continues to unfold and whether the market structure shifts further as more information about tariff implementation and potential retaliations becomes available. Investors will likely keep a close eye on any further developments in trade policy, as these decisions will shape market movements in the coming months.
Written by Prashanth Manoharan, Head of Execution Consulting, EMEA
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