The new normal: 4 long-term impacts of the pandemic on the stock market
The COVID-19 pandemic altered how we previously lived. The methods we work, communicate and live in have all changed as a result of some of those shifts, some of which were brief while others have persisted. This was also true of the stock market – this pandemic had changed it forever. In less than a month, in March 2020, the S&P 500 dropped more than 30%. Despite the fact that the market bounced back and reached new highs only five months later, it is now obvious that the shock of that time has had a long-lasting effect on the market in other ways.
After three years since the COVID-19 broke, we wanted to discuss some of these changes, the impact they’ve had on the stock market in the United States, and what it means for investors as we all adjust to the “new normal.”
Greater turbulence equals more volume. The increase in volatility was the most significant development in the stock market. In March 2020, compared to March 2019 levels, the daily average number of NBBO adjustments per symbol increased by about 4x. Volatility looks to have established a new normal, with peaks more than twice as high as in 2019, and where the new lows are greater than the previous highs, despite some easing in late 2020 through 2021 before soaring again in 2022.
The D-Peg and D-Limit order types on IEX Exchange are specifically created to assist investors in avoiding unfavorable selections at moments just before the NBBO changes, made possible by the distinctive protection provided by the Speed Bump and the Signal. These order kinds gain even more value in the “new normal” of the present.
High levels of stock market trading volume have continued along with volatility. Market-wide monthly trading volumes in 2019 averaged at least 8 billion shares per day. With approximately 15.5 billion shares traded each day in March 2020, market volumes reached a record high for the month. The quantity has decreased, but it has already fallen into a new normal range, averaging approximately 12 billion shares daily on average in 2022, an increase of 70% from 2019. Although this increased volume is initially beneficial for price discovery, since a large portion of it is not taking place in the usual on-exchange, single-stock trading environment, liquidity in some names may not be as strong as it appears.
The development of retail trading
The type of trade volume has changed in addition to the overall increase in volumes.
The pandemic occurred at the same time when fractional trading and zero fee trading became widely used by retail brokers. When “meme stock” virality propelled retail trading to an average of roughly 5 billion shares per day in January 2021, it marked the apex of a steady rise in retail trading during lockdowns (using FINRA OTC Non-ATS as a proxy for retail volume). Almost five times more than in November 2019!
Despite a slight decline, since 2021, the average level of retail activity has remained between two and three billion, or nearly three times more than it was before the pandemic – quite a shift in the stock market.
A large portion of that retail trade also takes place off-exchange. Although it reached a peak in January 2021 at 47.2% of total volume, off-exchange trading has continued to be popular: the first quarter of 2023 is on track to have the greatest off-exchange market share ever at more than 45%.
Stocks priced below $1, which are subject to different quoting and trading regulations on exchanges, have seen an increase in trading as a result of the growth of retail. In January 2021, sub-dollar volume as a percentage of market volume reached all-time highs above 13%. However, that record was broken in January 2023, when it reached 13.7% of market volume.
Volume moving away from inverted venues
The pandemic has also had a long-lasting impact on exchanges with inverted pricing systems. Several of today’s historical exchanges, including the NYSE and Nasdaq, use “maker-taker” pricing schemes, where the trader “making” the market (by placing a buy or sell order) is rewarded with a rebate payment, while the dealer “taking” the opposing side of that trade pays the transaction fee. An inverted venue like EDGA reverses that arrangement to “taker-maker,” where the “maker” pays the charge and the “taker” is given a rebate.
Almost 10% of the single-stock market volume in 2019 was made up of the four inverted venues (EDGA, BYX, BX, and NYSE National). Due to the varied pricing of inverted venues, which liquidity providers are more likely to access first, market participants frequently use these venues to “skip the intermarket queue.” With stocks with a smaller spread, being able to do this is extremely useful. As a result, inverted venues suffered significant market share losses in March 2020 due to spreads’ dramatically widening due to volatility.
But, as the pandemic progressed and spreads gradually shrank to within shouting distance of where they had been before, inverted venues failed to regain any of that market share and continued to plummet, reaching new lows of fewer than 3% of single-stock traffic in early 2023.
Inverted venues used to have significantly greater amounts of trading at the end of the day, but we have witnessed increased volume at IEX Exchange. Because IEX Exchange does not offer rebates to either party, our cost structure falls midway between that of a “maker-taker” and “taker-maker” venue.
A lopsided smirk for intraday volume
The pandemic of COVID-19 has negatively impacted the intraday volume curve. The volume patterns on the U.S. stock market typically resemble a tilted “smile”: high volumes at the market’s 9:30 a.m. ET opening and early in the day, a decline in volume in the middle of the day, a rise in volume even higher than before, and a peak right before the closing auction at 4:00 p.m. ET. Although the grin shape still exists, the pandemic shock lowered the severity of its arc, increasing volume in the morning shortly after markets open and decreasing it significantly by the end of the day.
As traders attempt to take part in the morning price discovery process and respond to pricing possibilities as the market sways, we see this as a second-order effect of ongoing volatility and the development of retail trading. This argument is supported by the recent correlation between rising volatility and rises in the percentage of volume traded in the morning.
The market will continue to shift since it is constantly evolving. But, three years after COVID-19 brought the world to a halt and sparked a seismic change in the markets, we are still feeling its aftershocks in the places and ways that equities trade in this “new normal.” The four above-described long-term impacts of the pandemic on the stock market will surely stay with us and one should definitely take them into account.