“Stop and take a breath.”

“Patience is a virtue.”

In normal times we at Luminex repeat phrases like these regularly to our clients, as we encourage them to take the time to find the right match to make a block trade. I’ve said natural block liquidity is the “Holy Grail” for traders, and the quest for it can be challenging for a trader’s patience even in “normal” times.

In our present moment, these messages may be even more relevant and worth reflecting on. After all, we have just lived through two of the busiest and most volatile months for the markets in more than a decade!

I know what you’re thinking, amid the upheaval of the past couple of months: who has time to write (or even read) a blog post? But I think right now, as I write this in the first week of May, there’s a feeling that things have settled down a bit. There’s still plenty of fear, and reason for concern, but recognizing where we’ve been fortunate and so many others have not, it feels like we can take a moment to reflect on what we’ve all gone through so far.

What follows are not sweeping philosophical pronouncements.  I just want to share what we’ve noticed in the marketplace and offer some thoughts as to why it’s happening.

The most interesting and counterintuitive thing we’ve observed is that block trading has been holding up very well.

Now, with equities we know that when volatility goes up, volume goes up. Everyone gets and expects that. But when volatility goes up, what happens to block volume can be a bit more nuanced.

Over the course of my 25-plus years on the buy side, whether it was managing equity portfolios, trading stock or managing a team of equity traders, it was my experience that when volatility increased, traders were generally reluctant to stand still long enough to trade a block of stock. But in the peak of the craziness of the pandemic trading, during the period of extreme volatility, the opposite happened.  Traders were noticeably willing to stand still longer and stand up to trade blocks.

What’s different now? Looking at the numbers more closely, there seems to be a tipping point with volatility and the willingness to trade blocks. When a VIX of 10-15 moves to a VIX of 16-20, traders tend to pull back and are less willing to trade blocks. At this level, risk is elevated, but not too elevated. Traders can take their chances spreading their orders across the day to avoid buying the high or selling the low. But behaviors change when there is a big shift in volatility. Once the VIX starts to move above 50 and even approach 80, blocks are back, and that is what we have seen in the current frenzy.

Why? Because when we hit those levels, that’s when traders move into “get it done” mode. When volatility is that super-elevated and you’re in a trading environment that is experiencing tremendous whipsawing and 3% to 5% daily moves, you become very motivated to buy or sell stock. You can’t afford to pick spots or even spread orders out across the day — and you certainly can’t afford to take overnight risk. It’s just too volatile, and that volatility means you’re willing to trade size if the opportunity presents itself.

Further, when volatility goes up, it means there’s less available capital, and what capital is available is far more expensive. Traders begin relying on off-exchange venues like Luminex more than they might otherwise. As flexibility becomes important, there’s a greater willingness to change their style. Simply put, sticking to the old, comfortable ways is a luxury of low volatility.

I don’t have a degree in psychology (though I did minor in sociology!), but I do have a sense of the real estate that COVID-19 has occupied in the minds of buy-side traders since March. Traders think first about their families and the millions impacted personally, and then they think about how it impacts their business. But traders are resilient and are expected to rise above it all. March-April of 2020 has proven that yet again. After a moment, what most traders have done is looked to their bosses and essentially asked, “what do you want me to do, where do I report, will I have the necessary equipment? We’re in crisis mode, and yes, I’m worried about my family and job, but tell me where you want me to go.” They might be at home and might be working on fewer screens than normal, but there’s a job to be done.

In short, we’re not in the “new normal”, but we are in “the new normal for now”.  It’s OK to take a moment to pat yourself on the back and listen to your Apple watch when it tells you to breathe. We’re over a real rough patch. But what comes next?

We’ll continue watching and we’ll let you know what we’re seeing.

Jonathan Clark
Luminex Trading & Analytics LLC

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