The Great Sell-Off: A Deeper Look at Wall Street’s Dramatic Fall
By Nazed Mannan, Senior Product Manager, BMLL
This August, America’s leading share indices tumbled in volatile trading just weeks after they scaled record highs, bringing about Wall Street’s worst day in almost two years. Using Level 3 historical data, I look at what really took place.
On 5 August 2024, markets in the United States fell 13%, in part thanks to Japan’s decision to hike up interest rates but also based on signals of a cooling US labour market. The US non-farm payroll figures - a measure of how many jobs were added to the US economy last month and one of the most tracked economic indicators in financial markets - came in much lower than expected for July.
The volatility resulting in the market over the past three weeks has caused some widening of bid/ask spreads in global equities. While they have tightened from the peak of this period, we look at Level 3 data and analytics to examine some of the other market dynamics in more detail. The following charts capture a Pan European equities universe across 22 markets and a basket of US 500 stocks comparable to S&P 500 and examine data around liquidity-at-depth, mean resting times, time weighted average spreads and notional traded.
Liquidity-at-Depth
Looking at Liquidity-at-Depth data, we can see the trend in the average order book depth (notional) across 5 different price levels of the order book. Figures 1.0 and 1.1 clearly show that order book liquidity declined substantially in the first week of August, we can see levels returning gradually. Clearly the impact was most evident at the top-of the book (Level 1).
Fig 1.0: Liquidity-at-Depth 5 Levels (Pan European Indices)
Fig 1.1: Liquidity-at-Depth 5 Levels (US 500)
Mean Resting Times
Mean Resting Time (a Level 3 data metric) looks at the duration of time passive orders sat on the order book before being filled, partially filled or cancelled. This metric can be used as an indicator of the turnover of liquidity.
Figures 2.0 and 2.1 shows that whilst liquidity across price levels dropped, the mean resting times dropped in tandem - this suggests that the lower levels of available liquidity were snapped up much more quickly. As liquidity across price levels increased, so did the mean resting times.
Fig 2.0: Mean Resting Time (Pan European Indices)
Fig 2.1: Mean Resting Time (US 500)
Time Weighted Average Spreads
This trading activity was subjected to widening spreads as seen in Figures 3.0 and 3.1, with participants paying more to trade - this has been an ongoing trend for the year so far in Europe, however less so for the US which has had spreads recently narrowing.
Fig 3.0: Time-Weighted Spreads (Pan European Indices)
Fig 3.1: Time-Weighted Spreads (US 500)
Notional Traded
Fig 4.0 and 4.1 round off the picture, despite lower levels of on-book liquidity, overall trading volumes increased. As the dust settles, and on-book liquidity levels return - trading volumes have dropped. Volatility has been essentially provoking greater market participation.
Fig 4.0: Notional Traded (Pan European Indices)
Fig 4.1: Notional Traded (US 500)
Going beyond top-of-book to gain a trading advantage
Using granular Level 3 data & analytics, and accessible research tools, trends are observable and measurable, including:
Average order book depth (notional) across 5 different price levels
The duration of time passive orders on the order book before being filled, partially filled or cancelled
Time weighted average spreads
Trading volumes
Granular Level 3 data and analytics help market practitioners look deeper beyond the top-of-book statistics to quickly understand these trends, thereby gaining a greater insight into recent market volatility, resulting in a trading advantage.