BMLL Market Lens: 2021 in Review
Using Level 3 Data, BMLL examined the impact on the capital markets of the following key events from 2021:
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How renewed UK-Swiss Equivalence Impacted Liquidity on the top 20 Swiss Stocks (1 of 3)
On 3 February 2021, UK and Swiss stock exchange equivalence was renewed. What was the impact on the top 20 Swiss stocks (by lit addressable total trade notional volume)??Participants who looked only at the top of the book saw a rise in orders, suggesting an increase in liquidity across trading venues within the UK and Switzerland. However, by going beyond the top of the book BMLL identified a clear increase in the Quote to Trade ratio, a Level 3 metric, (exhibit 1) where fragmentation of the markets lead to a dramatic rise in quotes but not an increase in trades.
Quote to Trade Ratio (exhibit 1) - Level 3 Metric
This effect is inversely mirrored in Fill Probability, a Level 3 metric, (exhibit 2) which fell as participants posted a higher number of quotes on multiple exchanges to capture the same fill. Therefore, while more orders were being placed on venues across the two regions there was not a meaningful impact on the overall liquidity profile.
Fill Probability (exhibit 2) - Level 3 Metric
How the $1.9tn American Rescue Plan Changed the US Market State (2 of 3)
The American Rescue Plan Act 2021, a $1.9 trillion economic stimulus bill, was designed to speed up the recovery from the effects of the COVID-19 pandemic and the ongoing recession in the US. What was the impact of the stimulus package on the US markets??In mid-February following the news of the likely passage of the bill, the market entered a more aggressive state. As demonstrated by an increase in Intraday Volatility, a Level 1 metric (exhibit 3). By mid-March, a decrease in volatility, indicated to many that market conditions had begun to stabilise.
Intraday Volatility (exhibit 3) - Level 1 Metric
However, by analysing a Level 3 metric such as Fill Probability (exhibit 4),?we can see evidence to the contrary. Fill Probability continued to sit significantly lower at the end of March than it had at the beginning of February, highlighting a continually aggressive market state, which had sustained far longer than most participants were able to identify.
Fill Probability (exhibit 4) - Level 3 Metric
(3 of 3) How the Market Responded to the Spread of the Omicron Variant
In November 2021, the rising infection rate of the Omicron COVID-19 variant spooked international markets, leading to increased volatility in each major index. This increase in volatility is exemplified by the widening of TWA Spreads, a Level 1 metric, (exhibit 5) on the US100 and FR40 indices. Interestingly, other major indices appear unaffected by the supposed change in investor sentiment.
TWA Spreads (exhibit 5) - Level 1 metric
By examing a Level 3 metric, Mean Resting Time (exhibit 6), we identified that volatility across the other major indices increased from late November. This is demonstrated by a drop in resting time, across the period. By the second half of December, Omicron fears waned and the market entered a seasonal passive period, leading to a brief decrease in volatility.
Mean Resting Time (exhibit 6) - Level 3 metric
*The US market appears unaffected due to the Mean Resting Time being significantly lower than its European counterparts, we saw a similar relative increase.
The increased sensitivity of the more granular, Level 3 metric enables participants to identify that the market states changed sooner and lasted longer than was indicated by the less granular, Level 2 metric.
Conclusion
By analysing BMLL Level 3 metrics, participants are able to examine the true nature of the markets. As we continue to witness increased volatility in the capital markets across 2022, it is important that participants are equipped with the fullest picture of market conditions, to make the most informed business-critical decisions.
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Footnote: The BMLL Data Feed is an API feed containing over 400 market metrics derived from the full Level 3 order book, including every single insert, modify, execute or delete order message across every venue, available at daily and intraday resolution.?
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