COVID-19 has disrupted the evolution of US equity market structure, says report


The COVID-19 pandemic is disrupting the evolution of the US equity market structure causing current exchanges to lose trading volumes and upending plans for new ones to launch. By Annabel Smith


The global pandemic has interrupted a period of significant change for US trading venues, while also minimizing volumes and pushing activity off-exchange, a new report has highlighted.


Greenwich Associates highlighted how coming into 2020, three new stock exchanges had announced their planned entrances and a host of regulatory actions loomed on the horizon. These included new order-routing disclosures, a delayed Transaction Fee Pilot, potential changes to unlisted trading privileges, and a proposed overhaul of the securities information processors (SIPs) for market data.


The pandemic has halted some of these transformative developments, the research outfit explained.


The report also revealed a major shift in US equity trading volumes away from the exchanges. In 2019, the Trade Reporting Facility (TRF) reported a stable level of off-exchange trading between 35 and 40%. Only 16 days reported having TRF volume above 40%.


However, the Greenwich Associates report confirmed that as of June 2020 reported TRF exceeding 40% had already been recorded 58 times.


“Standard market analysis would say that in such volatile times there would be a flight to the stability of the lit exchanges, and initially, this did indeed occur,” said author of the report and senior analyst at Greenwich Associates market structure and technology, Shane Swanson. “However, as the US equities marketplace proved its overall resilience, off-exchange volume not only rebounded but expanded.”

The report confirmed that the role of market makers and retail trading was having a significant impact on this increase of off-exchange trading.


“With proper systems, risk hedging and management, some market makers appear to have been able to internalise more trades with the retail market, resulting in the increase in market share moving away from the exchanges,” said the Greenwich Associates report.


The pandemic has also halted plans for several exchanges to launch. The new exchange entrant Members Exchange (MEMX) was set to go live this month after receiving regulatory approval from the US Securities and Exchange Commission (SEC) in May and financial backing from Citi, BlackRock, Wells Fargo, Flow Traders, Bank of America, Morgan Stanley, Virtu Financial, Citadel Securities, Fidelity Investments, and others.

However, MEMX will now launch in September this year. Other exchanges to experience delays include MIAX PEARL Equities and the Long-Term Stock Exchange (LTSE).


“With massive proposed changes to market data infrastructure on the SIPs, new exchange entrants eager to prove their value, and, of course, the coronavirus itself, the most certain bet is that 2020 will be one for the books,” added Swanson.

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