Completely happy New 12 months to all our common readers!
We’re kicking off 2025 with a countdown of what we predict have been the ten most attention-grabbing charts from our blogs in 2024.
As you’ll see, we lined a variety of totally different subjects – from introductions to choices and brief promoting to latency to creating markets higher for issuers and buyers.
We begin our countdown at quantity 10:
10. Our first interns’ information to choices
In 2024, we added to our suite of normal summer season interns’ guides. Along with introductions to market structure, how trading works and ETFs, we added a information to options markets.
This included a variety of info, resembling how possibility payoffs work, the place the liquidity in U.S. choices markets is, and when and the way every possibility expires (Together with a helpful desk exhibiting what choices expire within the open vs. the shut, and which have bodily supply).
However my favourite chart from the weblog appeared on the “moneyness” of choices being traded. Because the chart reveals, the vast majority of choices being traded when they’re “out of the cash.” That considerably reduces the premium prices (because the probability of train is decrease) and the quantity of hedging a market maker would want to do (because the delta is decrease). It additionally signifies that including up “choices notional worth traded” supplies a meaningless comparability to liquidity in underlying shares because the exposures and hedging are each effectively under 1-to-1.
Chart 10: Most choices are commerce when they’re out of the cash
9. Brief curiosity isn’t as scary because it appears
It is honest to say that buyers and corporations each don’t prefer it when their inventory costs fall. Nonetheless, it’s normally incorrect to focus blame on brief sellers.
As we detailed in a blog in 2024, there’s knowledge accessible to assist us perceive some facets of brief promoting.
First, we noticed that regardless of a really excessive proportion of trades having a “brief promote” flag on them, the precise ranges of brief curiosity (or holdings) out there are usually a lot decrease and steady. Because the chart under reveals, most shares have 5% or much less of their shares excellent held brief. That confirms that the majority brief promoting is finished by “bona-fide market makers” who’re required to promote and purchase all day (to qualify as a market maker) and never including to directional positions.
We additionally cited guidelines that require inventory to be borrowed earlier than settlement. That’s so consumers can obtain the inventory they purchased from a “brief” vendor – as with out that, the commerce would “fail.” And knowledge reveals that failing trades are comparatively uncommon, and most fails are for exceptionally small (most definitely retail) trades.
Chart 9: Most shares have under 5% of their shares excellent shorted
It’s additionally essential to notice that analysis persistently reveals that brief promoting makes markets extra environment friendly. It permits for hedging and cross-market arbitrage to happen, which helps preserve Futures and ETF costs appropriate and inventory spreads tight.
8. What defines a small-cap inventory will depend on the index supplier
Individuals incessantly discuss large-, mid- and small-cap shares – as whether it is clear what corporations are included in every group.
Nonetheless, our favourite chart from that study reveals that it may possibly rely lots on which index supplier you might be utilizing. In reality, the chart under reveals that some small-cap shares are bigger than the smallest large-cap shares. Though to be honest, that’s a results of worth modifications throughout the 12 months in addition to a acutely aware determination to reduce index turnover and buying and selling price for anybody operating an index fund.
Chart 8: Shares included in several market cap indexes by index supplier
7. index trades to estimate index monitoring
Index funds and ETFs are getting extra and more popular.
In one other examine, we looked at how a lot of an organization’s accessible shares commerce within the shut on an index addition date.
The outcomes have been revealing, exhibiting that the market can present an enormous quantity of liquidity immediately because the market closes as a way to fulfill indexer demand. That’s much more spectacular given latest analysis reveals the cost of that liquidity has been falling at the same time as index funds continued to develop.
Chart 7: The MOC is ready to take in enormous quantities of liquidity on index rebalance dates
6. Is the U.S. actually probably the most liquid market on this planet?
Individuals incessantly boast about how the U.S. is the most affordable, most liquid fairness market to commerce on this planet.
Nonetheless, with roughly 6,000 corporations listed within the U.S. versus lower than 900 corporations listed in France, is it even honest to check buying and selling in Apple to Whole?
It is fairer if we compute the “market-cap turnover” of every firm, which is measured because the instances the whole accessible shares commerce annually. That accounts for various share costs and market caps all over the world.
The outcome (as we present within the chart below) was revealing. U.S. liquidity was good, however not the best. Notably, liquidity in a variety of Asian nations – with usually robust retail markets – was, on common, even higher. Though, as one other chart in that examine confirmed, Asia’s bigger developed markets dragged the common for the entire area down under that of the U.S.
Chart 6: Annual market-cap turnover for every inventory (by nation)
5. Exchanges charges work very in a different way to ATS’s
The U.S. Securities and Trade Fee (SEC) was extraordinarily busy in 2024, finalizing a large number of latest guidelines. A number of focused exchanges and their price buildings, together with lowering access fees and eliminating quantity reductions for lcustomers who commerce and quote lots.
These guidelines solely affected how trade charges work, which was ironic, provided that 2024 was additionally the 12 months that off-exchange buying and selling handed the 50% mark (greater than as soon as). That’s particularly essential because it’s a degree thought of a tipping point vital to market high quality and having an NBBO that’s significant to the market and really protects buyers.
Briefly, by specializing in trade charges, the SEC missed the more and more aggressive economics of the “different half” of the market.
We’ve got stated earlier than that equal is not fair. That’s one thing that appears undeniably clear if you take a look at charges charged for the SIP (which embrace quantity reductions) and the way the SEC recoups its annual funds (which varies over time).
The economics of the “different half” of the market may be very totally different. Somewhat than being honest entry and equal (just like the SEC needs for exchanges), it’s bilateral and bundled, with buyer high quality tiers and segmentation that provides to unfold seize (allowing fees to be higher). In reality, because the chart under from this blog highlighted, ATSs cost a variety of charges – from “free” to a lot larger than the present trade price cap.
Both means, “ten” is clearly not the norm, nor might it’s stated that different charges within the market are “equal”.
Chart 5: Type ATS-N reveals simply how sophisticated market pricing is throughout (even off-exchange) venues
4. One millisecond is barely de minimis to a human
Years in the past, the SEC created a brand new “de minimis” rule designed solely to approve IEX’s velocity bump market (the identical 12 months they denied Cboe their very own velocity bump proposal, which was solely fractionally slower). The SEC has since leaned on that rule to approve IEX’s D-limit (fade-able but protected) lit quotes. Mockingly, the U.S. regulator declined to make use of it for figuring out an acceptable degree of latency for the SIP.
All of that historical past is related to a examine of buying and selling latency we did in 2024.
What we mentioned in that weblog was how, even on the velocity of sunshine, it takes time for a commerce to journey across the U.S. market for fills, which occur in real-time, fractions of a second aside, inflicting reverberations throughout the market.
In reality, what our favorite chart from that blog confirmed, utilizing microsecond timestamps (one-thousandth of a millisecond) is that we are able to see a variety of trades within the U.S. market provoke from Secaucus, the place most dealer algorithms are positioned. Initially, the orders from these algorithms journey at fiber velocity across the U.S. market (pink arrows), then, as fills are seen at every venue, a response appears to happen at microwave speeds (inexperienced arrows) earlier than lastly passing by means of the IEX velocity bump and buying and selling there final, if any of their quotes haven’t, by then, been repriced.
Even with the IEX velocity bump delaying trades occurring on their venue, from begin to end, this all occurs in lower than 1 millisecond.
Chart 4: Trades journey across the U.S. market and trigger reactions that final lower than one millisecond
3. Latency arbitrage detected in London darkish swimming pools
What we discuss in Chart 4 above is what leads individuals to speak about latency arbitrage. A brand new academic study confirmed how this may work in follow in darkish swimming pools in the UK.
Darkish swimming pools, by design, peg orders to the quotes set by exchanges. The chart from that blog that the majority clearly confirmed what they discovered is under. It reveals:
- The bid on trade rising (inexperienced shade).
- Earlier than a fill happens in a darkish pool on the “outdated midpoint.”
That is attainable as a result of “quick” arbitrageurs can ship a commerce on microwave, whereas quotes journey on optic fiber (which has a slower velocity of sunshine however is extra dependable).
The examine discovered that “a considerable quantity of stale buying and selling happens [in dark pools].” In addition they discovered that arbitrageurs have been on the successful facet of the commerce greater than 96% of the time – shopping for on the stale midpoint whereas promoting on the major markets at a more moderen, larger worth.
Chart 3: Darkish fills occurring at outdated midpoints due to distance-created latency
It has since been replicated throughout Europe, with analysis from Euronext, SIX Swiss and Deutsche Börse discovering related outcomes.
This examine has essential implications for the consolidated tape debates occurring in Europe and elsewhere.
As we’ve stated earlier than, all prices are delayed, and a consolidated tape will at all times be (even) slower. That’s why even our opponents say a consolidated tape ought to never be used for trading.
Stated one other means, a consolidated tape can by no means be pre-trade (it’s simply physics). Nonetheless, it may very well be used to quantify how a lot buying and selling is going on at these stale quotes.
This has market construction implications, too. The fragmentation reduces the fill chance to darkish pool prospects (even when a purchaser crossed the lit market unfold) but additionally makes unfold seize tougher on the first market tougher (as unfold crossers are principally extra aggressive trades). The result’s worse economics for worth setters and finally wider spreads and less depth.
2. Depth and spreads react to fundamental economics of provide and demand
Tick sizes have been studied in depth by us and teachers. The findings are all fairly constant, exhibiting that the economics of spreads and depth are pushed by easy provide and demand.
Within the blog where we summarized these findings, probably the most related chart is the one under. It reveals that:
- Provide and demand curves for shares are usually fairly linear.
- Lowering the tick (for tick-constrained shares) helps to scale back not solely the unfold but additionally the depth. For buyers, spreads and depth are a trade-off.
Primarily based on all of the research, the one outcome that was capable of enhance each spreads and depth of the NBBO was the trade-at group within the Tick Pilot examine (proven as G3 under). Curiously, that’s what occurs when the worth setter will get to seize their very own unfold – moderately than BBO getting used to commerce elsewhere like we see in chart 3 above.
Chart 2: Analysis reveals bettering spreads virtually at all times worsens depth; it’s a trade-off with out trade-at
1. Nasdaq has higher auctions for issuers
Throughout 2024, we noticed the five hundredth firm swap from NYSE to Nasdaq.
Clearly, all of us commerce in an NMS world (Nationwide Market System) with UTP (unlisted buying and selling privileges) which means shares can commerce anyplace – no matter the place they’re listed.
However after we take a look at the information, we see that Nasdaq market high quality is nonetheless better for corporations.
Our favourite chart from that blog appeared on the open and shutting auctions. It reveals that totally different public sale guidelines can cut back a inventory’s volatility. That’s essential as a result of analysis means that it may possibly cut back an organization’s cost of capital, which ought to result in further investments and returns for buyers. This, in flip, is sweet for the U.S. financial system.
Chart 1: Switches have decrease public sale volatility on Nasdaq
We hope everybody had a contented and wholesome vacation season. We’re wanting ahead to bringing extra new and attention-grabbing insights all through 2025. 
