Increasing volatility shines a light on the value of block liquidity
We are two months into the market dislocation caused by the Iran conflict. While headlines have been dominated by the rapidly evolving situation, we’ve been fielding questions from Members on how the conflict has impacted the trading environment and trading behaviour.
At Liquidnet, we have a unique view of the trading environment across our own liquidity pools and across global venues. Analysing institutional activity across our global dark venues paints an interesting picture of how the war has shaped investor sentiment.
First, however, it is important to put the market response in perspective and understand market conditions before the conflict erupted. February was an exceptional month for global trading. For Liquidnet, it was characterised by relatively strong investor conviction and liquidity, resulting in the highest dark volumes we’ve seen in many years.
Post-escalation, uncertainty dominated global markets. In Europe, for example, volatility (V2X) surged from an average of 19.1 in February to 29.8 in March (1), the highest level since the start of the Ukraine war in 2022. Similar movements were observed in the VIX (18.5-24.9) (2), whereas the VHSI index saw a more subtle increase (23.2-26.5) (3).
Diverging behaviour
We saw greater volatility and higher general market volumes. In EMEA, volumes increased 7% between February and March, extending previous gains and now tracking 21% up vs PYTD (4). US volumes increased 2% from February to March, up 30% vs PYTD (5). Conversely, global daily buy-side indications in Liquidnet’s dark pools fell from $74.1bn to $61.7bn. This confirms a trend we’ve seen in similar periods of volatility, namely that institutional investors typically ride out periods of heightened uncertainty and any increase in trading volumes tends to be driven by non-institutional often shorter duration activity.
On a similar theme, in these periods we often see institutional investors dial down trade size - choosing to trade a smaller portion of the parent order when they find a match. In March, globally we saw a 4% fall in this submission rate. This is a natural reaction to a higher risk environment as the trader executes multiple clips over time to mitigate price risk.
Following the start of the conflict we have seen several other behavioural trends emerge:
Institutional and broker match divergence: The decline in institutional liquidity led to a 17% fall in the number of institutional matches, while broker matches increased 33%. This rise in broker activity is typical in periods of volatility as orders tend to be worked more over time. Institutional matches globally continued to out-size broker matches by over 75%.
Higher algo uptake: We saw many Members ‘channel shift’, using our algo suite rather than block matching service to access Liquidnet and the broader market.
Higher conversion: Since the start of the conflict, the incidence of trade-aways, where an order is matched by Liquidnet but executed somewhere else, fell by over 13% in March. Anecdotally, we hear clients talk about valuing our coverage model, better workflow and higher quality fill in difficult times.
The value of blocks
Although institutional volumes have fallen as investors have remained on the sidelines, the quality of liquidity available in the pool has persisted – contributing to and increasing successful trading outcomes. Globally in February, the market impact savings for executing in Liquidnet were 41.4bps with an average trade size of $2m. In March, savings increased 17% to 48.7bps while average trade size fell 15% to $1.7m.
This data reinforces the enduring role that blocks play in helping institutional investors navigate periods of heightened volatility. While the conflict has added to uncertainty, it has also increased the premium placed on executing size efficiently, discreetly and with minimal market impact.
The persistence in institutional engagement, higher conversion rates and greater reliance on trusted workflows underline the value of block trading in volatile markets. In this extraordinary trading environment, Liquidnet is focused on giving investors the tools and liquidity to navigate uncertainty with confidence.
1 Source: STOXX EURO STOXX 50® Volatility (VSTOXX®) - STOXX
2 Source: Cboe Global Indices: Cboe Global Indices: VIX Index Dashboard
3 Source: Hang Seng Indexes HSI Volatility Index
4: Source: Bloomberg
5: Source: FINRA
All statistics can be assumed Liquidnet Internal data unless otherwise specified.
Written by Chris Jackson, Global Head of Equities