Market makers are not responsible for volatility in US stock markets, says Citadel Securities

Recent bouts of volatility in the U.S. stock market were not caused by tech-driven market makers, according to an in-depth review of in-depth accounting data by Citadel Securities.

The US-based liquidity provider released an analysis of aggregate order book data from direct data feeds from US stock groups, revealing that several episodes of heightened volatility in the US stock market observed over the past 12 months had nothing to do with quantitative investment strategies and computerized business activities.

Market participants and observers often point to changes in market structure, regulation, or the rise of electronic market makers, as factors that lead to periods of rapidly declining stock prices or market liquidity. scaled down.

“Given that the fundamental forces that positively reshaped our stock markets have been at work for over a decade, it seems unlikely that they are responsible for the deterioration in market liquidity or, by extension, episodes. of volatility observed over the past year, ”Citadel Securities said.

Citadel Securities described today’s market as “incredibly competitive”, with a new generation of technologically sophisticated market players emerging as the “primary providers of liquidity”. These participants replaced the old dealers, including the big banks, which were slow to compete in more automated markets.

“This new competitive landscape has been in place for much of the past decade, again making it an implausible cause of recent market swings,” Citadel Securities said. “As banks today face constraints in conducting certain trading activities, it is difficult to see how this explains stock market volatility, given the negligible role that banks have played as as liquidity providers in these markets for over a decade. “

The study claimed that liquidity in US stock markets over the past eight years has, in fact, been “remarkably stable”, and market resilience during the global financial crisis “compares favorably to over-the-counter markets. intermediated by banks “. , such as some derivatives markets which suffered during this period.

A close look at liquid stocks, including Microsoft, Apple, and Google, found that the cost of executing large trades has remained relatively constant, but spreads have narrowed for medium and small trades, contributing to the idea that liquidity has diminished.

Although this perception, which Citadel Securities has called erroneous, is often derived from analysis of the size displayed at the best national offers and offers, rather than the total depth of liquidity displayed on the US exchanges.

“Our size-adjusted spread measure for a $ 1 million S&P 500 trade, for example, hovered between two and four basis points (bps) for virtually the entire eight-year period measured. Similar patterns hold for $ 10 million (3-6 bps) and 100 million trades (9-24 bps) in this large-scale benchmark, ”said Citadel Securities analysis.

“While recent and past declines in liquidity depth (i.e. increases in size-adjusted spreads) have coincided with peaks in the VIX, this has not been exclusively the case. and the data does not suggest that the depth or resilience of liquidity is fundamentally different today. than it has been in the past eight years.