Trading Best Practices for Volatile Markets
Coronavirus anxiety and a potential oil price war have contributed to increased volatility in the markets.
Investors should be mindful of trading best practices, particularly during times of heightened volatility.
Given significant pre-market volatility driven by coronavirus anxiety and the beginnings of a potential oil price war, there was considerable uncertainty as stock markets were set to open on Monday, March 9. Shortly after market open, we saw the triggering of Level 1 Market Wide Circuit Breakers (MWCB) for the first time since they took effect in 2013, resulting in a 15-minute trading halt across all National Market System (NMS) securities.
As a reminder, there are three MWCB levels that trigger trading halts at various thresholds and time durations:
As we experienced on March 9, there is typically heightened volume, as well as increased probability of volatility, at the open and close of each trading session as markets work to absorb new information at the open and settle trading imbalances at the close. For this reason, we recommend not trading market-on-open (MOO) or market-on-close (MOC).
It’s worth reviewing some additional thoughts on the best trading practices to guide investors in today’s market, as current volatility may persist. Our first strategy is simple. If you do not have to trade in volatile times, we recommend that you do not. If you choose to buy or sell ETFs, or any other securities, during periods of heightened volatility, we recommend that you place your trades using limit orders.
A limit order identifies the maximum and minimum prices at which you want to buy or sell a security. Unlike market orders that execute immediately at the next price, limit orders do not guarantee execution. They do, however, provide control over price level and allow investors to manage execution risk, which is particularly useful when volatility spikes.
Limit orders generally aren’t necessary, although are still encouraged, for very liquid ETFs—like the SPDR® S&P 500® ETF (SPY)—where there are millions of shares offered at each price point with very narrow bid/ask spreads.1 However, limit orders can be a useful execution tool in less actively traded securities and, again, can help to reduce adverse price impact in times of market stress.
Exchange traded funds are known for their tradability, yet 88% of all US-listed ETFs trade less than $25M per day, on average.2 It’s therefore critically important to evaluate an ETFs liquidity profile—in addition to the market environment in which you trade—prior to making execution decisions. Additionally, the way in which you trade may depend on the ETF’s liquidity profile and/or current market conditions. Here are some insights on how to optimize trade execution for ETFs of all levels of liquidity.
SSGA has a long-standing commitment to market quality in our ETFs and deep relationships within the trading community. As one of the industry’s largest ETF providers, we are committed to collaborating with the industry, including exchanges, issuers and other market participants to deliver a high level of service to ETF investors in all market environments. Our SPDR Capital Markets Group is in regular communication with market makers, exchanges and liquidity providers in an effort to monitor the liquidity of our products for the benefit of our clients and investors. Should you have any questions on ETF trading in general or during bouts of volatility, please contact us.