Trading Strategy: US Market Structure Chartbook

Market Rebounds, But Liquidity Lags

Overall U.S. exchange volumes averaged 7.5bn shares in the

first quarter of 2019, down just 1.4% from 2018 Q1. The

average stock volume was actually close to flat YoY with the

slight drop driven more by a fall in ETF trading volumes. With

the market starting off at a lower base to begin the quarter

though, value traded was 11% smaller - averaging $337bn

daily vs $378bn in the first quarter of 2018.

However, the quarter-over-quarter change was a much more

significant change with average daily volumes falling 11%

versus 2018 Q4 amidst a decline in market volatility as the

market rose. The Fed pivot likely played a role in helping U.S.

equities rebound and lifting stock indices close to all-time

highs.

Relative ETF trading drops: As volatility dropped, ETF

trading also fell from over 30% of daily value traded in 2018

Q4 to more normal levels in the mid to high 20s this quarter.

We’ve shown in the past that ETF volumes are especially

correlated to volatility (even more so than stocks) and the first

quarter was no different. Interestingly, even as overall ETF

volumes declined, ETF block trades have increased as a

percentage of volumes – reflecting a strong institutional

presence. In particular, fixed income and international equity

funds have been increasingly active in the block space.

Trading costs trend back down, but still elevated: As

the market came to an uneasy calm, several measures of

liquidity reverted closer to recent norms. Bid-ask spreads

returned to pre-October levels with the average large-cap

spread between 3 and 4 bps. Additionally, our impact cost

index also decreased significantly - although costs still remain

above previous lows.

But market depth remains shallow: While many measures

of liquidity have improved substantially and stock indices are

back near record levels, market depth remains relatively

shallow. Aggregate top-of-book depth for the components of

the S&P 500 (and similarly for S&P 500 futures) have slowly

climbed upwards, but are still below pre-October levels and

well below the average depth during 2016-2017. Thus, the

contradiction between this lack of liquidity depth and the stock

market highs creates a significant amount of uncertainty.

Without sufficient depth, volatility shocks could be

accentuated and this reinforces our previous views that the

liquidity environment continues to support a market that can

quickly switch between volatility extremes.

Could

Market Commentary 15 April 2019

Victor Lin + 1 415 836 7643

Exhibit 1: ETF Trading Reverted Back to Less Extreme Levels in Q1

Source: Credit Suisse Trading Strategy, TAQ

Exhibit 2: Estimated Impact Costs Came Down With Volatility

Source: Credit Suisse Trading Strategy, TAQ

Exhibit 3: Depth Remains Shallow Even as Equities Near Highs

Source: Credit Suisse Trading Strategy, TAQ

0

10

20

30

40

50

60

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Jan

-18

Jan

-19

Imp

act

Co

st (

bp

s)

TRADING STRATEGY

Intraday volatility subsides

Intraday volatility curves nearly halved from the fourth quarter of 2018. On average, the price volatility during the day ended up similar

to the second quarter of 2018, in between the extremes of the volatile 2018 Q4 and the quiet 2018 Q3. Based on the intraday

volatility curves, we can estimate impact costs at different times of the day and also see how they compare historically. Impact cost

models show that as much as volatility has declined this quarter, the estimated impact of trading near the open currently is as much (if

not more than) trading near the end of the day during the volatile Q4. Note that these estimates are projected for a single stock; a

basket of stocks (e.g. an index) would on average have less total impact at the beginning of the day due to diversification (the

diversification benefits would decline as we move closer to the market close and stock moves become more correlated).

Exhibit 4: Intraday Volatility (log scale) Exhibit 5: Intraday Impact Cost Estimates

Source: Credit Suisse Trading Strategy, (trade size 10% of ADV, participation rate 10%) Source: CS Trading Strategy, TAQ, (trade size 10% of ADV, participation rate 10%)

Calendar liquidity tendencies

Volumes generally reflect volatility and information flow. This can manifest in calendar-oriented tendencies as we show in Exhibits 6

and 7. Historically on normal days (i.e. no major scheduled liquidity event), Thursday has the highest volumes, especially as there

tend to be a larger proportion of earnings releases on this day. Conversely, Monday sees the lightest activity. For the most part,

those patterns have held in 2019. However, Friday has been unusually busy as well – perhaps aided by risk aversion to holding

positions over the weekend given certain macroeconomic and geopolitical uncertainties.

In terms of other calendar-related triggers, there are perceptions that quarter-end and month-end are above-average volume days.

This is the case for month-end days, which have seen volumes about 10-20% higher than average over the past few years.

However, in recent years this has not been the case for quarter-end days, possibly as traders take advantage of the liquidity available

on triple witch instead.

From a major event perspective, triple (or quad) witching are the biggest scheduled liquidity events and the volumes on March 15th

were in-line with previous years. MSCI (last business day of May) and Russell (June 28th this year) are the next big liquidity events on

the calendar.

Exhibit 6: Average Trading Levels by Day of Week Exhibit 7: Special Event/Day Liquidity

Source: Credit Suisse Trading Strategy, TAQ

Source: Credit Suisse Trading Strategy, TAQ

TRADING STRATEGY

Global Volumes

Source: Credit Suisse Trading Strategy, TAQ, Bloomberg, Date through March 2019

TRADING STRATEGY

US Volumes

Source: Credit Suisse Trading Strategy, NYSE TAQ, Bloomberg, Data Through Mar 2019

Avg stock prices rise back near

highs. Avg trade size has bottomed

TRADING STRATEGY

Intraday Volatility

Source: Credit Suisse Trading Strategy, Bloomberg, NYSE TAQ, Data Through Mar 2019

Bid-Ask Spreads

Source: Credit Suisse Trading Strategy, NYSE TAQ, Data Through Mar 2019

Volatility in the 1ST quarter of 2019

trends down.

Spreads back down to

pre-October levels

TRADING STRATEGY

Volume Curves and Closing Volumes

Source: Credit Suisse Trading Strategy, NYSE TAQ, Data through Mar 2019

Closing auction volumes continue to climb

TRADING STRATEGY

US Equity Market Share Breakdown

TRADING STRATEGY

ATS Market Share

Source: Credit Suisse Trading Strategy, FINRA

TRADING STRATEGY

Regulatory Radar As of April 2019

Topic Description

SEC

• WH Nominates Allison Lee: The White House nominated Allison Lee for the last open seat on the Commission and would be the second Democrat on the Commission. She served at the SEC from 2005 to 2018 in various roles. If confirmed (potentially late Q2 or Q3), the SEC would be back to a full slate of Commissioners.

• 2019 Market Structure Agenda: SEC Chairman Clayton and Brett Redfearn (Director of Trading & Markets) recently gave a speech on equity market structure and highlighted their 2019 agenda, focusing on addressing issues discussed in 3 roundtables last year on market structure for thinly-traded securities, regulatory approached to combating retail fraud, and market data and market access.

Market Data and Access

• The SEC raised concerns that the current two-tiered system of market data and market access (core data and proprietary data) may no longer be appropriate as technology and business practices have evolved.

• Many feel that the core consolidated public data feeds may no longer be sufficient to trade competitively. The SEC suggested exploring improvements related to speed, content, order protection/best execution, depth, governance, transparency, and fair access. Clayton also suggested a review of Reg NMS may be forthcoming.

Thinly-traded Securities

• The SEC is considering allowing issuers of thinly-traded securities to suspend unlisted trading privileges (“UTP”) for non-listing exchanges, while continuing to allow off-exchange trading to maintain competition amongst trading venues. See Nasdaq 2018 application seeking to suspend UTP of certain Nasdaq listed stocks.

• The intention would be to not only aggregate liquidity, but also to foster innovation such as periodic auctions, manual market making, etc.

Transaction Fee Pilot

• Transaction Fee Pilot on Hold: The Transaction Fee Pilot is largely on hold as the SEC addresses legal challenges from the New York Stock Exchange, Nasdaq, and Cboe.

• Previously, the SEC adopted new Rule 610T of Regulation NMS to conduct a Transaction Fee Pilot in NMS stocks to study the effects of transaction-based fees and rebates on order routing behavior, execution quality, and overall market quality. The SEC will subsequently announce dates for the pre-Pilot, Pilot, and post-Pilot Periods. Approximately one month prior to the beginning of the Pilot Period, the SEC will issue the List of Pilot Securities and Test Group assignments.

• There are two test groups and a control group. The first test group would have fee cap of 10 mils ($0.0010) and the second test group would prohibit rebates and linked pricing.

• Each group would have 730 NMS stocks with average daily trading volumes greater than or equal to 30k shares with a share price equal to or greater than $2.

• The Pilot will require the national securities exchanges to prepare and post on their public websites transaction fee and rebate data on a monthly basis. In addition, the Pilot will require the national securities exchanges to prepare and provide to the Commission, on a monthly basis, aggregated order routing data.

Exchanges

• Nasdaq and Euronext continue to compete to buy Oslo Bors. • Virtu completed its acquisition of ITG in a cash transaction valued at a total of ~$1bn. • Bank of America Merrill Lynch, Charles Schwab, Citadel, ETrade, Fidelity, Morgan Stanley, TD Ameritrade, UBS, and Virtu

are planning to launch a new, low-cost exchange (Members Exchange, or MEMX). Jonathan Kellner was appointed CEO of the venture.

• ICE is contemplating a speed bump (3-millisecond) for its gold and silver futures contracts.

ETF Rule Proposal

• SEC proposed on June 28th

that an ETF Rule be adopted. The rule is intended to provide a consistent framework for ETFs operating under the Investment Company Act of 1940 to operate without seeking exemptive relief.

• Daily Transparency: Requiring all issuers to disclose daily holdings. • Custom Baskets: Allowing issuers to utilize custom creation/redemption baskets (provided certain conditions are met). • Website disclosure: ETFs would be required to disclose certain information on their websites intended to educate

investors about the efficiency of an ETF’s arbitrate process. • The comment letter period closed October 1, 2018.

Consolidated Audit Trail

• Plan approved in Nov 2016 to create a consolidated audit trail of all NMS securities. • FINRA was selected in late February to replace Thesys Technologies for the implementation of the project. • For equities, testing is expected to commence in December with a go-live data of April 2020 barring any further delays.

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