NYSE floor closing in early 2020 – what’s the “algorithm”?

Let us now analyze how trading dynamics, such as hidden liquidity, were affected by the suspension or close of the New York Stock Exchange (NYSE) floor. Through the specialist’s quotes, the floor members help improve prices, attracting more liquidity takers. Therefore, in the absence of floor members actively providing liquidity to the market and improving prices, hidden limit order traders may take on a bigger role in supplying liquidity. 

“Floor broker effect”

Older studies suggest that floor traders are a viable source of hidden liquidity and pre-trade anonymity. Consequently, when the NYSE OpenBook service was introduced, which allowed more traders to self-manage their orders, hidden volume executed by floor brokers declined. These studies suggest that, at least historically, floor traders handle a considerable portion of hidden liquidity. The studies also imply that closing the NYSE floor, potentially mitigating the role of the floor trader, may lead to a reduction in hidden liquidity, specifically in NYSE-listed stocks (in other words, the stock part of the market). 

Although floor brokers may have played a less significant role in providing liquidity decades ago, NYSE’s hybrid auction format allows floor brokers to manually submit nearly 35% of the orders. Moreover, the hidden floor broker volume tends to peak toward the end of the closing auction period. However, NYSE’s analysis that found accumulated hidden discretionary “D-Orders”, which have essentially replicated the manual role of floor brokers in handling contra-side orders, dropped from 30% to 0% during the closing auction period during the NYSE floor close. Unlike NYSE’s hybrid auction format, the NASDAQ operates under a fully electronic auction market.

Therefore, during the NYSE close period, the presence of floor brokers and hidden “D-Orders” declined during the closing auction period. Hidden liquidity declined more in NYSE-listed stocks than in NASDAQ-listed stocks. However, if the NYSE close period was symbolic, the suspension of the NYSE floor had a negligible impact on changes in hidden liquidity.

How the stock market game changed

The closing of the NYSE floor appears to be more symbolic than consequential for U.S. markets since many electronic trading platforms and trading algorithms have replaced the role of human traders, specifically floor traders and specialists. However, despite the notion that floor traders have become increasingly irrelevant. After the NYSE floor suspension, both price efficiency and market quality worsened.  However, while some demonstrate that closing the NYSE floor impacts liquidity, they do not empirically address algorithmic trading (AT) changes during the NYSE floor suspension. 

Throughout this blog post, we try to examine the effects of the market uncertainty and NYSE close period on NYSE and NASDAQ-listed stocks. To the extent that the NYSE floor suspension was more than symbolic, we assume that during the floor suspension, NYSE-listed stocks were more impacted than NASDAQ-listed stocks, given that the NYSE functions as a hybrid auction market with considerable human interaction. In contrast, the NASDAQ is a fully electronic auction market.

Some researches show through two separate periods and a matched sample of NYSE- and NASDAQ-listed stocks and a difference-in-difference analysis how COVID-19 market changes influenced trading dynamics. The results indicate that during the market uncertainty period, both proxies for AT and fragmentation decrease, indicating that algo traders withdrew from the market during market turbulence. Simultaneously, it is discovered that hidden liquidity peaks during the market uncertainty period. Following the suspension of the NYSE floor, it is found that proxies for AT and market fragmentation remain lower relative to the NYSE floor reopening period. The hidden liquidity levels remain elevated during the NYSE close period relative to the NYSE floor reopening period.

Despite withdrawing from the market during the heightened uncertainty, the remaining traders appear to improve market quality during the market uncertainty period. This last result is consistent with the premise that during periods of market stress and extreme price volatility, certain high frequency traders, particularly those that provide liquidity, actively aid markets by stabilizing prices and minimizing spreads. The latest analyses demonstrate that HFTs can act as endogenous liquidity providers (ELPs) during periods of market stress. Still we assume that COVID-19 likely caused extreme price movements across many stocks. However, some studies indicate it should lead to HFTs switching from liquidity supply to liquidity demand, exacerbating illiquidity.