Traders struggle to trade stocks on volatile US stock market

The high volatility in US stocks like Meta, PayPal and Snap this week reflects surprises in their financial results but also shows what investors think has recently significantly reduced the likelihood Trade large stock lots.

Liquidity — the ability to buy or sell assets without affecting price — has been a hallmark of the $51 million US stock market. But over the past two weeks, money managers have observed its decline, with the increased costs of completing large buy or sell transactions and prompting some to avoid large trades altogether.

Patrick Murphy, a partner at GTS, a market maker group, said: “Liquidity for the day was very depleted. “I haven’t seen anything like it since March 2020.”

Rocky Fishman, chief strategist at Goldman Sachs, noted that liquidity has “weakened significantly” to the extent that the spread between the prices at which traders can buy or sell S&P 500 e-mini futures contracts , one of the most popular instruments for betting on the US stock market, has regularly hit 50 cents in the past two weeks. This is more than double the standard 25 cent spread registered in a healthy market.

“Liquidity is weak. . . leaves the potential for bigger market moves,” he said.

Those swings were on display as some of the biggest companies in the US reported results, with results falling short of Wall Street estimates, a drastic drop in value rarely seen outside of a crisis.

Shares of Facebook Meta Owners Fall more than a quarter on Thursday, the worst day on record with more than $230 billion wiped off market capitalization. PayPal dropped nearly 25% after it missed forecasts. Last month, Netflix to slide the most in almost a decade.

Shares of social media company Snap fly up more than half and Amazon rose about 15% in after-hours trading after quarterly earnings late Thursday, indicating a sharp increase when exchanges reopen on Friday.

Traders describe “air pockets” in the market, when prices change rapidly and in one direction. The head of one of the largest trading desks on Wall Street said the so-called block market – where brokers help execute large stock trades that can range in size from tens of millions of dollars to more than $1 billion – was “mostly closed” during the worst market volatility.

Line chart of year-over-year performance (%) showing Stocks of major tech companies hit 'airbags'

“Due to increasing volatility, the price to execute any type of trade has become so broad that it is difficult to combine sellers and buyers as buyers want a discount that reflects risk,” the person said. say, refers to the difference between the ask and ask prices for certain stocks.

The chaotic conditions came like investors reposition their portfolios to adjust to tighter monetary policy from the Federal Reserve, which is seeking to contain inflation and cool a rapidly growing economy.

“You have a crossover between macro and monetary policy at the same time as the micro news around earnings,” said Ron Temple, head of US equities at Lazard Asset Management. “On Wall Street, the vast majority of traders, strategists and portfolio managers have not experienced inflation like this. The volatility is exacerbated by earnings season, but I think it will persist throughout the year as people try to figure out where this will settle. ”

Increased volatility and underperforming markets have led many investors to turn to exchange-traded funds, where they believe they can buy or sell large volumes of stocks quickly without change the fund’s price as if it were trading shares of a public company.

According to BlackRock’s iShares unit, US-listed ETF trading volume hit a record January 24 at $475 billion, much higher than the previous peak set in February 2020 when coronavirus first shook US financial markets, according to BlackRock’s iShares unit.

However, in a sign that the block market isn’t completely closed yet, Morgan Stanley made a sale of 40 million shares in electric utility company PG&E to a customer on Monday for the money. raised just under $500 million, one person said briefly of the transaction.

Line chart Trade Size in S&P 500 e-mini futures that can be completed at a live ask or quote price (millions of dollars) showing Liquidity has ' exhausted' on the US stock market

High-speed trading firms and traditional brokers have begun to show a desire to provide more liquidity to the market, albeit at a very low level. Traders this week could trade about $3 million worth of S&P 500 e-mini futures at prevailing market prices, according to Goldman data, up from a low, according to Goldman data. $2.2 million in January but still a fraction of the average for the past two years.

The persistently weak market conditions have led traders to prepare for further volatility.

“The biggest takeaway is how far these volatility has come,” said Chris Murphy, co-head of derivatives strategy at Susquehanna Investment Group. “There is a bit of a feedback loop, when volatility increases, liquidity decreases, and when liquidity decreases, volatility increases.”

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