George Rosenberger is Head of NYFIX, Broadridge Trading and Connectivity Solutions.
George Rosenberger
What were the key theme(s) for your business in 2024?
The T+1 settlement cycle change was a very visible and impactful change in the industry in 2024. While some firms were prepared well in advance, many were not leading them to scramble for solutions. While some of the larger industry vendors started to turn clients away, because it was too close to the implementation window, we were able to onboard them in time to be compliant with the regulation effective date.
What are your expectations for 2025?
We will see continued investments in technology particularly around data analytics and piping those analytics into buy-side and sell-side OMS platforms. Data driven strategies, compliance checks and routing rules will start to become the norm to remove the burdensome part of the trading process from the actual trader so they can focus more on execution quality. The availability of expansive and cost-effective compute power coupled with AI and Machine Learning will lead to pivotal advancements in the industry by summarizing large data sets in microseconds allowing for the formation of new trading ideas and insights while also helping clients optimize their order placement and execution costs.
What trends are getting underway that people may not know about but will be important?
People need to become workably proficient with AI. The advancements in AI is ever changing and getting involved early and solidifying understanding of the technology will not only allow people to become comfortable using it in your everyday life, but also help them to become more effective in their job by automating mundane tasks, analyzing large datasets quickly in order to generate new ideas, and allowing for more focus on strategic business areas and core operations.
What is Broadridge doing specifically in the area of AI to improve the lives of our customer?
Broadridge has a strategic focus and dedicated resources helping to create innovative AI solutions for our clients. Whether it is BondGPT, which assists users in identifying corporate bonds and answers complex bond-related queries; BondGPT+, the enterprise version of BondGPT; OpsGPT, a Gen-AI-powered co-pilot that uses transaction, settlement, and position data to provide clients real-time visibility for faster fail resolution; Tradeverse, a real-time, multi-asset, unified global data platform foundational to delivering the value of data and AI to clients; or our new algorithm insights service that analyzes large historical and real-time datasets to recommend the optimum algo strategy to use for the particular name that the trader needs to execute; Broadridge is focused on innovation to help our clients be more efficient, effective and compliant.
(EXECUTION MATTERS is a Traders Magazine content series focused on the topics most important to traders and technologists in US equities and options markets. EXECUTION MATTERS is produced in collaboration with Lime Trading Corp.)
As business winds down for the year-end holidays, it’s commonly perceived that trading activity in equity and options markets is also quiet.
But while aggregate volume numbers may trend lower over the few weeks spanning mid-December to early January, and many senior institutional traders are home with family or on vacation, there are several items of significance on the calendar that market participants need to stay plugged in for – especially this year.
First, the Federal Reserve concluded its final meeting of 2024 on December 18, lowering its benchmark interest rate by 25 basis points while also signaling a slower pace of rate cuts in 2025. That guidance sent stocks lower.
Then, quadruple witching, or “quad witch” day on Friday, December 20, will see the simultaneous expiration of four major financial instruments: stock index futures, stock index options, stock options, and single stock futures.
The concurrent expiration of the derivatives contracts typically results in higher trading volume and market volatility, while also impacting the short-term valuation of securities.
December 20 is also a big day for index rebalances, with the S&P 500, S&P 400, S&P 600, and Nasdaq 100 set to add and remove certain companies to ensure the respective indices stay properly balanced in light of current market conditions. Index rebalances can result in significant trading activity as fund managers benchmarked to indices buy and sell stocks to maintain their desired exposures.
And there’s the end of the fourth quarter and the end of 2024, which both fall on the shortened trading day of Tuesday, December 31. There is often increased trading activity on the last day of investment reporting periods, as fund managers finalize their portfolio positions for year-end reporting and calculations, as well as tax considerations.
Johan Sandblom, President and Head of Business Development at agency broker and market access provider Lime Trading Corp., noted that all these events are happening as market participants re-position for the upcoming change from a Democratic to a Republican presidential administration, and also the “Santa Claus rally” calendar effect that typically sees stock rise in the last five trading days of December and the first two trading days in January.
The S&P 500 Index has gained 27% year to date as of December 17, though it has been about flat this month. “The first half of December historically isn’t all that great,” Ryan Detrick, Chief Market Strategist at Carson Group, told Yahoo Finance on Dec. 16. “It’s the second half of December” that has driven positive returns in nine of the past ten election-year Decembers, he said.
“It is a misconception that there is nothing going on in the markets in December,” Sandblom told Traders Magazine. “At Lime, it is all hands-on deck during this active and volatile month.”
Magnus Haglind is Head of Products for Marketplace Technology at Nasdaq.
Magnus Haglind
What were the key theme(s) for your business in 2024?
2024 has been an incredible year at Nasdaq, establishing our Financial Technology business which saw the integration of our Marketplace Technology, Surveillance, and Anti-Financial Crime Technology with the market-leading platforms Calypso and AxiomSL following our acquisition of Adenza. That comprehensive portfolio of mission-critical solutions offers a unique vantage point on major themes across the financial ecosystem as our clients look to solve their toughest operational challenges.
They are seeking solutions that help them reduce the burden of ever greater regulation and supervisory oversight, while optimizing for liquidity and capital. Underlying that is a widespread need to simplify inherent complexity within their businesses to break down internal silos. They are also increasingly looking to partners like Nasdaq to help keep pace with innovative new technologies and the forces of disruption.
On the market infrastructure side, there is an almost overwhelming realization across exchanges, clearing houses and central securities depositories of the need to modernize their underlying architecture, or risk being left behind as innovative new technologies begin to define the new generation of capital markets.
What was the highlight of your year?
In May, we convened more than 100 industry leaders within our Financial Technology client community, discussing a range of topics across market infrastructure, AI, regulation, and innovation. It was fascinating to listen and share emerging insights, and tremendous value to bring our network together.
Modernization was a critical thread through these discussions, not just in terms of making sure operators have the right applications, but more fundamentally about how they ensure they have the right operating model in place. Innovative technologies like cloud and AI are driving meaningful conversations about the critical capabilities they will need in the future, and whether they should source those in-house, or from external providers.
Given the excitement and realisation of the importance of gen-AI, operators are rightly asking themselves: “How do I ensure I have access to those capabilities”. With the level of energy and compute capacity that will be required – and the investment they will need to make in their own infrastructure to even stay relevant – they want to make sure they aren’t left alone to source everything themselves.
What are your expectations for 2025?
In line with the much broader market modernization theme, the pace at which Gen-AI has matured across the industry over the past year bodes reflects a strong trend that will only continue to gain momentum. From a Nasdaq perspective there are already multiple examples of AI being embedded into our platforms, including the first AI-powered order type, dramatically improving the efficiency of bank risk calculations and market surveillance.
The momentum behind crypto and digital asset markets is also helping to drive greater focus on tokenization of asset classes, alongside a greater push towards 24×5/7 markets. Nasdaq’s trading technology has long been used to support 24/7 trading in digital asset markets and we’re seeing increased appetite to expand this service across a broader range of asset classes.
What will the industry look like in 20 years’ time?
The next generation of global capital markets will be characterized by a fabric of globally connected markets, with common data lake architecture, the ability to interact seamlessly across exchanges, minimal latency, and the flexibility to incorporate new products and functionality.
The question then becomes about how we get there. This type of modernization goes beyond a point in time, but rather a process of continual change. Operators that haven’t already embarked on that modernization journey – investing in their data strategy and reflecting on their long-term operating model – risk being left behind. We’re excited to play a leading role in that transition as the backbone of many institutions’ tech stack.
Stephen Callahan is Trading Behavior Specialist at Firstrade.
What were the key theme(s) for your business in 2024?
Stephen Callahan
As we approach the close of 2024, we at Firstrade are reflecting on our goals and assessing how successful we’ve been in achieving them. Our focus this year was on growth and improving efficiency with our existing staff. We’ve made significant progress by interviewing and hiring new personnel, and we’ve promoted members within our two call centers. With staff located in both New York and Florida, as well as remote and overnight representatives, we have greater flexibility to serve our growing customer base. Additionally, we introduced FirstradeGPT to streamline research inquiries. Expect more of exciting developments in the new year.
What are you most excited for in 2025?
We have an enhanced IRA Match Bonus we plan to deploy soon that will incentivize new customers to open accounts and contribute funds, as well as encourage current clients to transfer or rollover retirement assets. Our goal is to attract new clients while establishing lasting relationships. Both new and existing clients will also discover the other advantages of having an account, including first-rate research, a user-friendly trading platform, a state-of-the-art options platform, all with no fees. Firstrade was one of the first firms to set the standard for getting more for less, and we will continue to lead the way.
While we are not market forecasters, we are preparing for the new year by maintaining our commitment to customer service and expanding the Firstrade brand to the trading community. As long as we remain nimble and responsive to clients’ concerns and market trends, we’ll be well-positioned for 2025.
Like most market observers, we are pleased with the current bull market and hope it continues. The tailwinds leading up to the presidential election have only strengthened. When much of the market was tech-heavy but poised to rotate into other sectors, we were ready. President-elect Trump’s statement that he wouldn’t fire Fed Chair Jerome Powell may have sent a message that he aims to avoid market disruption. Additionally, Trump’s comments about not cutting Social Security could encourage investors to become more creative or speculative with retirement assets. The potential for tax cuts and deregulation may provide further stimulus.
We expect our new overnight trading offering, along with the IRA and transfer promotions, to drive new account enrollments and increase trading volume.
As long as we continue to raise Firstrade’s profile in the retail investment community, offer exceptional service with no fees, and remain agile (like a boxer) in responding to market changes, we’ll continue to thrive.
Josh Krugman is SVP Brokerage, Fidelity Investments.
Josh Krugman
What were the key theme(s) for your business in 2024?
The last year was marked by a continuation of record-high trading activity at Fidelity, with a broad group of self-directed investors turning to Fidelity as they worked to build a stronger financial future. Our teams have been laser-focused on evolving our platform to meet the needs of a range of self-directed investors, from those looking for a diversified portfolio built through recurring investments to those seeking downside protection or income generation through options strategies.
What was the highlight of 2024?
We are constantly listening to our customers and using their insights to build platforms that support what they need to be successful investors. We were able to deliver on these needs in big ways in 2024, with new software, web experiences and mobile developments. For our advanced traders, we began rolling out a completely new version of our Active Trader Pro software, “ATP Beta,” built from the ground up to deliver more real-time insights and analysis together with a streamlined trade execution experience. In the options space, traders can now use our Options Strategy Builder to build their first (or second, or third) options trades, with contextual education throughout the experience to help them build confidence.
What are you most excited for in 2025?
In 2025, I expect we’ll continue to see high trading volumes, particularly as global and domestic markets react to shifts in leadership both here in the U.S. and around the world. We’re working to provide education and resources to help investors break down the headlines and distill the signals from the noise. And of course we’ll continue to enhance the platforms our investors use to trade – whether that’s our mobile app, Trading Dashboard on Fidelity.com, or the new ATP Beta. In 2024, we saw continued increases in digital engagement from our customers, with a 17% increase in unique individuals engaged digitally in Q3 ’24, and we’re excited to continue that momentum into 2025.
What trends are getting underway that people may not know about but will be important?
There are a lot of buzzwords in the brokerage industry at the moment – 0DTE, AI, 24/5 trading, prediction markets, and so much more. At Fidelity we take a longer term view to supporting our customers. Rather than focusing on near-term trends, we’re planning for the next five, ten, fifteen years of customer needs. What will our customers need to be successful investors? That’s what we’re constantly evaluating. There are throughlines that become apparent in all of the above, and we need to see those and use our insights to ensure we’re delivering a best-in-class trading experience for our clients. We continually invest in technology and tools to provide strong digital capabilities for today and innovate for the needs of tomorrow with the value and transparency customers expect.
Stephanie Farrell is Head of Integrated Trading Solutions, Americas, Northern Trust.
Stephanie Farrell
What were the key theme(s) for your business in 2024?
In the intensifying battle for alpha, managers are looking at different avenues for growth, as reflected in our 2024 survey of 300 global asset managers. Asked which asset classes they plan to target for increased distribution, 71% of managers identified infrastructure, 54% identified digital assets and 49% said real estate. But expanding into new asset classes often comes with a price: increased complexity. Managers may lack the market knowledge and access needed to enter new asset classes and markets, and they may not have expertise in place to execute trades at the highest levels of effectiveness and efficiency. An outsourced provider can offer global trading capability from desks in multiple regions, staffed with expertise in local/regional markets and numerous exchanges across asset classes. A firm entering markets in the APAC region, for example, could use an outsourced provider to tap into expertise in local market trading and settlement to help with activities such as trade oversight and foreign exchange execution at a low variable cost.
Many managers are evolving their operating models to match a changing market, and they are increasingly widening their scope to outsource functions in the front office, including the trading desk. Nearly 30% of the respondents to our survey who have not yet outsourced identified trading as a function they would outsource. While managers have consistently focused on cost in recent years, they are now turning their attention to outsourcing for its potential to increase the quality of their execution.
What was the highlight of 2024?
2024 was a significant growth year for Integrated Trading Solutions, Northern Trust’s outsourced trading offering, across asset classes and client segments. We have seen broader adoption and managers of scale seeking outsourced partnerships as a way to augment or enhance in-house capabilities. Fixed Income was a sizeable area of growth and opportunity for us, where we saw a significant increase in volumes year over year. The growth came from larger mandates or new allocation across fixed income sectors, and managers utilizing the outsourced trading as a way to enter these markets. In equity markets, we saw greater diversification to global emerging markets and small cap trading.
What are your expectations for 2025?
We expect the adoption of outsourced trading models to continue moving from niche to norm as large-scale managers evolve their operating models. Our clients continue to diversify, moving into new asset classes or global markets where they may not have the in-house expertise or technology to support new areas of investments. A sharp focus on increased distribution and client experience will be another driver, with managers looking for a trusted partner to provide whole-office support — including front, middle and back-office solutions – backed by investments in the latest technology. Every asset manager is unique, and an outsourcing partner with long-established expertise and credibility can allow firms to go to market more quickly while deploying their in-house resources in the most efficient way.
By George Rosenberger, Broadridge Trading and Connectivity Solutions, and Linda Giordano & Jeff Alexander, Babelfish Analytics
A recent rise in proprietary trading has created a fresh challenge for traders: more inaccessible liquidity. Initially driven by retail trading surges, traders continue to grapple with managing this liquidity gap. Now it seems that more firms are now turning to riskless principal trading, and while this may offer a refuge from uncertainty, it can further exacerbate liquidity challenges on exchanges and in dark pools, continuing the trend towards market fragmentation and decentralization.
The New Liquidity Paradox
Retail trading surged during the COVID-19 pandemic, with platforms like Robinhood and Fidelity seeing high activity. Beyond the pop culture frenzy over meme stocks like GameStop, AMC, and Tesla, retail trading volumes skyrocketed across many widely held names, including Amazon, Boeing, and Apple. Based on FINRA, CBOE and other data sources, retail trading totals 25 to 30% of activity, but in some stocks, individual investors are driving 40 to over 50% of volume. A large portion of these trades not only transpire off-exchange, but occur via direct trading arrangements that are the result of payment for order flow (PFOF.) These mutually beneficial trading arrangements allow retail brokers like Robinhood and Fidelity to offer free commissions and price improvement and market makers like Citadel Securities and Virtu benefit by capturing the spread and controlling large quantities of shares.
Since late 2023, proprietary trading has surged as buy-side traders work to navigate liquidity-constrained stocks, intensifying off-exchange activity and further limiting accessible liquidity. Surprisingly, Morgan Stanley and Goldman Sachs’ specialty desks sometimes rank among the top ten liquidity providers, surpassing exchanges like IEXG and MEMX. With retail PFOF arrangements accounting for 25-30% of inaccessible liquidity and riskless principal trades adding another 10-15%, over 40% of shares can sometimes be locked away in direct trading arrangements. While this activity usually represents only handfuls of trades, the quantities are significant enough to disrupt broader trading strategies, especially as it is reported via “de minimis.”
FINRA data, week of July 1, 2024
Navigating a Liquidity Crunch
Reduced liquidity can lead to price discovery issues, with wider effective spreads on lit exchanges due to the significant gap in on-exchange liquidity. This distorts price signals and impacts transparency, as critical information about true supply and demand remains hidden. Volatility risks increase in stocks with higher retail participation, where prices are often driven by crowdsourced sentiment rather than fundamentals. This volatility undermines stability and raises risk premiums for institutional trades.
Market share compression becomes evident as alternative liquidity venues like dark pools and smaller exchanges see reduced volumes, requiring institutions to transact on primary lit markets. This shift raises operational costs and exacerbates challenges in sourcing liquidity efficiently. Collectively, these factors highlight the systemic complexities introduced by fragmented and inaccessible liquidity.
Impact on Algorithmic Trading
Without specifically adapting algorithms for situations with inaccessible liquidity, traders may find that they cannot achieve expectations. VWAP strategies can be disrupted as intraday volume patterns are distorted by the unaccounted-for off-exchange activity, making volume profiles not indicative of the trading reality. Traders using percent-of-volume algorithms will miss their desired participation rates because total reported volume is more than accessible volume. Liquidity seeking, dark, and arrival algos, which are typically biased towards minimizing costs by preferencing alternative destinations, may struggle to execute in low liquidity destinations. This can be calamitously inappropriate in situations when adverse momentum is present and result in extremely costly results.
These disconnects result in missed stock, information leakage, higher market impact, and worse execution prices. These challenges underscore the need for trading strategies that account for the complexities introduced by large retail participation and prop trading.
Implications for Institutional Traders
Institutional traders are increasingly faced with higher trading costs in stocks with substantial inaccessible activity. These stocks exhibit wider spreads and higher impact costs, making execution both expensive and unpredictable. Algorithms that rely on historical volume profiles are particularly vulnerable, as they are more likely to signal large orders to the market, exacerbating price slippage.
The challenges extend beyond individual trades to affect portfolio-level strategies. Fund managers encounter heightened risks when constructing portfolios, especially when managing large positions in retail-heavy names. Liquidity miscalculations can result in prolonged unwinds and additional costs. The dynamic and volatile nature of retail trading means that institutional traders must adapt to a rapidly shifting landscape, where traditional strategies may no longer be effective.
Adapting to the New Reality
In an increasingly fragmented market environment, it is crucial to understand where liquidity naturally resides, particularly during adverse price trends. Selecting appropriate strategies and destinations that account for participation is vital. This involves leveraging advanced analytics, enhancing pre-trade analysis, and adjusting order slicing strategies to address the complexities introduced by reduced liquidity conditions. Paramount to reducing negative outliers and aggregate costs, traders must match the market situation with the proper trading algorithm, using dynamic and systematic advanced analytics.
By making these adjustments, institutional traders can navigate the challenges posed by inaccessible liquidity, ultimately maintaining competitive execution and efficiency in a market increasingly influenced by retail players.
George Rosenberger is Head of NYFIX at Broadridge Trading and Connectivity Solutions
Linda Giordano is Founder & CEO at Babelfish Analytics, Inc.
Jeff Alexander is Founder & President at Babelfish Analytics, Inc.
TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
With the holidays rapidly approaching, it’s an opportune time to review the year to date and look ahead to what might be in store for 2025.
Tech Tuesday covered many topics in 2024, ranging from regulatory proposals on U.S. equity market structure to trends in options markets, exchange technology in Latin America and the development of carbon markets.
But assessing the most-viewed Tech Tuesday articles of the year reveals two technology topics that resonated most: trading speed and artificial intelligence (AI).
Nasdaq Chief Economist Phil Mackintosh, a frequent Tech Tuesday guest author, published two related articles about trading speed among the dozen most-hit Tech Tuesdays in 2024: Trading as Fast as Lightning, published on May 7, and How Trades Speed Between Venues, published on June 11.
The first article noted that fiber optics, microwave and lasers replaced trading pits as trade-transmission methods over the past 50 years and cited the advantages and disadvantages of each. The upshot is that even seemingly minute differences in trading speed matter to some market participants.
“Even in an Olympic race, a split second can be the difference between winning and second place – here, it might mean completing an arbitrage or being legged and exposed to losses,” Mackintosh wrote. “It’s likely that the race for lower latency will continue.”
The June article followed up on that with an analysis of actual action and reaction times between different markets. “We see evidence that optic fiber and radio wave dominate in different scenarios,” the article stated. “We also see that the price-setting exchange has the lowest latency and, therefore, the lower opportunity for microwave to provide advantages to traders.”
While trading speed and the ‘race to zero’ is a topic that has been important to market participants and infrastructure providers for more than a decade, generative AI is a much newer topic of interest. But with the spotlight on gen AI as perhaps the most impactful emerging technology across industries, it’s no surprise that it was alongside trading speed as a popular topic among Tech Tuesday readers in 2024.
How AI is Changing Trading, published on August 13, covered how Nasdaq is leveraging AI to modernize markets and offered an academic perspective on AI and big data applications for investment and asset management.
Assessing the ‘Incredible Capability’ of Gen AI, published on July 16, presented takeaways from the AWS Summit New York, including a bold statement that Gen AI represents “probably the single largest shift in how we interact with data, information and each other since the advent of the very earliest Internet.”
Lastly, Assessing the Present and Future of AI in Markets, published on May 21, featured a Q&A with Nasdaq Head of AI and Emerging Technology, Mike O’Rourke, to learn more about the current AI landscape and its expected evolution.
AI will likely be a hot topic for the foreseeable future. In capital markets, it is gaining traction in areas including market surveillance and abuse prevention, market analysis, investment strategy development and trade execution. More broadly, asset management giant BlackRock noted in a 2025 thematic outlook that “massive investment in AI infrastructure as well as ever more powerful chips and models, are laying the groundwork for increased adoption” across industries.
Traders Magazine and Nasdaq would like to thank Tech Tuesday readers for their interest and support throughout the year. We wish you a great holiday season and a happy, healthy and prosperous 2025!
Tech Tuesday will resume on Tuesday, January 7, 2025.
The Office of the Comptroller of the Currency (OCC) reported cumulative trading revenue of U.S. commercial banks and savings associations of $16.5 billion in the third quarter of 2024. The third quarter trading revenue was $263 million, or 1.6 percent, more than in the previous quarter and $3.3 billion, or 25.0 percent, more than a year earlier.
In the report, Quarterly Report on Bank Trading and Derivatives Activities, the OCC also reported that as of the third quarter of 2024:
a total of 1,225 insured U.S. national and state commercial banks and savings associations held derivatives.
four large banks held 88.1 percent of the total banking industry notional amount of derivatives.
credit exposure from derivatives decreased in the third quarter of 2024 compared with the second quarter of 2024. Net current credit exposure decreased $23 billion, or 9 percent, to $237.0 billion.
derivative notional amounts increased in the third quarter of 2024 by $10.7 trillion, or 5.2 percent, to $218.8 trillion.
derivative contracts remained concentrated in interest rate products, which totaled $150.5 trillion or 68.8 percent of total derivative notional amounts.
Interactive Brokers Enhances IBKR Desktop Trading Platform with New Tools and Features
Combining Streamlined Design with Powerful Trading Technology
GREENWICH, CT, December 16, 2024—Interactive Brokers (Nasdaq: IBKR), an automated global electronic broker, announced updates to IBKR Desktop, a modern trading platform for investors who demand simplicity but value Interactive Brokers’ advanced technology. With no platform fees and a user-friendly interface packed with advanced features, clients can easily facilitate simple trades across asset classes and complex order types. Suitable for both experienced traders and novice investors, IBKR Desktop offers superior order execution, competitive pricing and an extensive suite of global investment products designed to optimize trading and enhance investment strategies.
With IBKR Desktop, clients can trade stocks, options, futures, currencies, bonds, and funds on over 150 markets worldwide and access popular and exclusive tools that prioritize customization and flexibility. MultiSort allows clients to sort data using multiple factors simultaneously, while Options Lattice presents a graphical options chain highlighting potential outliers in key metrics.
Steve Sanders, EVP of Marketing and Product Development at Interactive Brokers, commented, “Responding to client feedback, we built IBKR Desktop from the ground up to leverage our proven technology and support an expanding suite of services. The result is a sophisticated yet intuitive trading platform for traders of all levels.”
Power meets simplicity in the IBKR Desktop platform, and recent updates further improve the trading experience for clients:
Options Tools:
Options Wizard: Identify options strategies that match a market outlook.
Option Chain in Custom Layouts: Add one or multiple option chains into layouts and customize data columns to show option-specific data, such as the Greeks or Implied Volatility, and use color grouping to connect to other tools in the custom layout area, such as the Rapid Order Entry, to create trades.
Options Screeners: Sort and scan for option data with new dedicated sections and sub-tabs that offer complex combination strategies volume and trades for the day, among other features.
Charting Enhancements:
Symbol Comparison: Compare multiple symbols on a single chart and add multiple assets to the same chart to analyze relative performance, correlation and trend patterns.
Volume Candles: Visualize market activity that reflects price movements relative to traded volume to provide a clearer view of where the most significant trading activity takes place.
Customizable Date Range: Choose a specific date or go to a custom date range.
Hot News: View the latest news stories relevant to a specific symbol.
Indicators: Pivot Point Standard, Volume Profile Fixed Range, 52 Week High/Low, Accelerator Oscillator, Correlation Coefficient, True Strength Index and more.
About Interactive Brokers Group, Inc.: Interactive Brokers Group affiliates provide automated trade execution and custody of securities, commodities, and foreign exchange around the clock on over 150 markets in numerous countries and currencies, from a single unified platform to clients worldwide. We serve individual investors, hedge funds, proprietary trading groups, financial advisors and introducing brokers. Our four decades of focus on technology and automation has enabled us to equip our clients with a uniquely sophisticated platform to manage their investment portfolios. We strive to provide our clients with advantageous execution prices and trading, risk and portfolio management tools, research facilities and investment products, all at low or no cost, positioning them to achieve superior returns on investments. Interactive Brokers has consistently earned recognition as a top broker, garnering multiple awards and accolades from respected industry sources such as Barron’s, Investopedia, Stockbrokers.com, and many others.
Contacts for Interactive Brokers Group, Inc. Media: Katherine Ewert, media@ibkr.com
Managing the Liquidity Maze in Modern Markets
By George Rosenberger, Broadridge Trading and Connectivity Solutions, and Linda Giordano & Jeff Alexander, Babelfish Analytics
A recent rise in proprietary trading has created a fresh challenge for traders: more inaccessible liquidity. Initially driven by retail trading surges, traders continue to grapple with managing this liquidity gap. Now it seems that more firms are now turning to riskless principal trading, and while this may offer a refuge from uncertainty, it can further exacerbate liquidity challenges on exchanges and in dark pools, continuing the trend towards market fragmentation and decentralization.
The New Liquidity Paradox
Retail trading surged during the COVID-19 pandemic, with platforms like Robinhood and Fidelity seeing high activity. Beyond the pop culture frenzy over meme stocks like GameStop, AMC, and Tesla, retail trading volumes skyrocketed across many widely held names, including Amazon, Boeing, and Apple. Based on FINRA, CBOE and other data sources, retail trading totals 25 to 30% of activity, but in some stocks, individual investors are driving 40 to over 50% of volume. A large portion of these trades not only transpire off-exchange, but occur via direct trading arrangements that are the result of payment for order flow (PFOF.) These mutually beneficial trading arrangements allow retail brokers like Robinhood and Fidelity to offer free commissions and price improvement and market makers like Citadel Securities and Virtu benefit by capturing the spread and controlling large quantities of shares.
Since late 2023, proprietary trading has surged as buy-side traders work to navigate liquidity-constrained stocks, intensifying off-exchange activity and further limiting accessible liquidity. Surprisingly, Morgan Stanley and Goldman Sachs’ specialty desks sometimes rank among the top ten liquidity providers, surpassing exchanges like IEXG and MEMX. With retail PFOF arrangements accounting for 25-30% of inaccessible liquidity and riskless principal trades adding another 10-15%, over 40% of shares can sometimes be locked away in direct trading arrangements. While this activity usually represents only handfuls of trades, the quantities are significant enough to disrupt broader trading strategies, especially as it is reported via “de minimis.”
Navigating a Liquidity Crunch
Reduced liquidity can lead to price discovery issues, with wider effective spreads on lit exchanges due to the significant gap in on-exchange liquidity. This distorts price signals and impacts transparency, as critical information about true supply and demand remains hidden. Volatility risks increase in stocks with higher retail participation, where prices are often driven by crowdsourced sentiment rather than fundamentals. This volatility undermines stability and raises risk premiums for institutional trades.
Market share compression becomes evident as alternative liquidity venues like dark pools and smaller exchanges see reduced volumes, requiring institutions to transact on primary lit markets. This shift raises operational costs and exacerbates challenges in sourcing liquidity efficiently. Collectively, these factors highlight the systemic complexities introduced by fragmented and inaccessible liquidity.
Impact on Algorithmic Trading
Without specifically adapting algorithms for situations with inaccessible liquidity, traders may find that they cannot achieve expectations. VWAP strategies can be disrupted as intraday volume patterns are distorted by the unaccounted-for off-exchange activity, making volume profiles not indicative of the trading reality. Traders using percent-of-volume algorithms will miss their desired participation rates because total reported volume is more than accessible volume. Liquidity seeking, dark, and arrival algos, which are typically biased towards minimizing costs by preferencing alternative destinations, may struggle to execute in low liquidity destinations. This can be calamitously inappropriate in situations when adverse momentum is present and result in extremely costly results.
These disconnects result in missed stock, information leakage, higher market impact, and worse execution prices. These challenges underscore the need for trading strategies that account for the complexities introduced by large retail participation and prop trading.
Implications for Institutional Traders
Institutional traders are increasingly faced with higher trading costs in stocks with substantial inaccessible activity. These stocks exhibit wider spreads and higher impact costs, making execution both expensive and unpredictable. Algorithms that rely on historical volume profiles are particularly vulnerable, as they are more likely to signal large orders to the market, exacerbating price slippage.
The challenges extend beyond individual trades to affect portfolio-level strategies. Fund managers encounter heightened risks when constructing portfolios, especially when managing large positions in retail-heavy names. Liquidity miscalculations can result in prolonged unwinds and additional costs. The dynamic and volatile nature of retail trading means that institutional traders must adapt to a rapidly shifting landscape, where traditional strategies may no longer be effective.
Adapting to the New Reality
In an increasingly fragmented market environment, it is crucial to understand where liquidity naturally resides, particularly during adverse price trends. Selecting appropriate strategies and destinations that account for participation is vital. This involves leveraging advanced analytics, enhancing pre-trade analysis, and adjusting order slicing strategies to address the complexities introduced by reduced liquidity conditions. Paramount to reducing negative outliers and aggregate costs, traders must match the market situation with the proper trading algorithm, using dynamic and systematic advanced analytics.
By making these adjustments, institutional traders can navigate the challenges posed by inaccessible liquidity, ultimately maintaining competitive execution and efficiency in a market increasingly influenced by retail players.
George Rosenberger is Head of NYFIX at Broadridge Trading and Connectivity Solutions
Linda Giordano is Founder & CEO at Babelfish Analytics, Inc.
Jeff Alexander is Founder & President at Babelfish Analytics, Inc.