Traders struggle to trade stocks in a volatile US stock market

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The huge swings in US stocks such as Meta, PayPal and Snap this week have reflected surprises in their financial results, but also underscore what investors say has been a recent dramatic decline in the ability to trade large lots of stocks.

Liquidity – the ability to buy or sell an asset without influencing the price – has been a hallmark of the $51 billion U.S. stock market. But over the past two weeks, fund managers have watched its deterioration, with rising costs to make large buys or sells and prompting some to avoid making big trades altogether.

“Intraday liquidity has dried up so much,” said Patrick Murphy, a partner at GTS, a market-making group. “I haven’t seen anything like this since March 2020.”

Rocky Fishman, a Goldman Sachs strategist, noted that liquidity has weakened “so dramatically” that the difference between the prices at which traders can buy or sell futures on the e-mini S&P 500 index, l One of the most popular tools for betting on the direction of the US stock market, has been frequently hitting 50 cents over the past two weeks. This is double the standard spread of 25 cents recorded in a healthy market.

“Low liquidity. . . leaves the potential for outsized market moves,” he said.

These swings were on display as some of the largest companies in the United States reported results, with those below Wall Street estimates plunging in value on a scale rarely seen outside of a crisis.

Shares of Facebook owner Meta fell more than a quarter on Thursday, its worst day on record with more than $230 billion wiped from its market capitalization. PayPal plunged nearly 25% after missing forecasts. Last month, Netflix slipped the most in nearly a decade.

Shares of social media company Snap soared more than half and Amazon rose about 15% in after-hours trading after its quarterly results late Thursday, suggesting strong gains when trading reopens Friday.

Traders described “air pockets” in the market, when prices moved quickly and in one direction. The head of one of Wall Street’s biggest trading desks said the so-called block market – where brokers help close big stock trades that can range in size from tens of millions of dollars to more than billion – had “mostly close” during the worst market swings.

“Due to the increased level of volatility, the price to execute any type of trade has become so wide that it’s very difficult to match sellers and buyers because buyers want discounts that reflect risk,” the company said. person, referring to the difference. between bid and bid prices for certain stocks.

The turbulent conditions come as investors reposition their portfolios to adjust to tighter monetary policy from the Federal Reserve, which seeks to tame inflation and cool a rapidly growing economy.

“You have this intersection of macro and monetary policy alongside the micro earnings news,” 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 such inflation. Volatility is exacerbated by earnings season, but I think it will remain throughout the year so that people are trying to figure out where it’s going to go.

Rising volatility and poor market functioning have prompted many investors to turn to exchange-traded funds, where they believe they can buy or offload large blocks of stocks quickly without changing the price of the fund as much. they would if they were trading the shares of a public company.

US-listed ETF trading volumes hit a record January 24 of $475 billion, well above the previous peak set in February 2020 when the coronavirus first rocked US financial markets, according to BlackRock’s iShares unit.

In a sign, however, that the block market is not entirely closed, Morgan Stanley on Monday executed a sale of 40 million shares in electric utility PG&E for a client who raised just under 500 million, said a person briefed on the transaction.

Line graph of the size of an S&P 500 e-mini futures trade that can be made at the live bid or ask price (in millions of dollars) showing that liquidity has 'dried up' in the US stock market

High-speed trading firms and traditional brokers have started to show more appetite for providing liquidity to the market, albeit at very low levels. Traders this week can trade about $3 million worth of S&P 500 e-mini futures at the prevailing market price, Goldman data shows, up from a low of $2.2 million in January, but still a fraction the average of the last two years.

Continued weak market conditions left traders bracing for increased volatility.

“The biggest benefit is how extreme these swings have been,” said Chris Murphy, co-head of derivatives strategies at Susquehanna Investment Group. “There’s a bit of a feedback loop, as volatility goes up, liquidity goes down and as liquidity goes down, volatility goes up.”

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