Fast signals, short horizons: How market mechanics are changing

A year has passed, and we are already seeing significant market volatility, volumes, and dynamics.

Whether it’s the search for beta and risk appetite from individual investors in January/February around the inauguration, the interplay between U.S. exceptionalism and European recovery, the “Liberation Day crisis,” or the various periods of momentum trading and exits from consensus positions… Goldman Sachs’ top macro trader Bobby Molavi notes that it feels like much more than just five months.

In the short term, Goldman colleagues Lee Coppersmith and Ben Snyder highlight interesting market breadth charts, showing we are in a low-breadth market environment.

Amid some optimism around trading and fiscal policy, Goldman’s trading team reports demand for long positions in IWM due to:

1. High gross exposure levels versus low net exposure levels;

2. Hedging portfolios with high-quality assets;

3. Potential for an upward breakout, as the Russell Index is at the 100-day moving average and a resistance line.

However, Molavi’s short note isn’t focused so much on markets, macroeconomics, politics, or fundamental drivers of what we observe.

It’s more about the changes in market structure and trading that now influence everything after investment decisions are made.

Namely — how we trade equities, what has changed in trading… and what that means for impact, signal, and outcome.

It also concerns portfolio managers and analysts, who often stand one step removed from the daily technical aspects of trading in today’s market ecosystem. Much of the content here is familiar to those who trade daily… but perhaps less so for CIOs, heads of equities, or PMs who spend more time on research, company meetings, and investment decisions.

To begin with… the fabric of the markets is changing.

We live in a world where private capital has grown from $1 trillion to $13 trillion.

“Private for longer” or “private forever” is becoming a force to reckon with.

In public markets, passive investing has steadily grown over the past two decades and now dominates in terms of assets under management.

We see ETFs established as the preferred trading instrument. We see individual investors becoming a significant force, both in volume (between $200–300 billion annually in the U.S.) and through households holding around 53% of the U.S. equity market. We see liquidity (especially in Europe) becoming increasingly fragmented and harder to interpret. We see new sources of liquidity emerging via platforms, exchanges, and new participants. We see the market close moment accounting for an increasing share of daily trading volume. We see new products influencing where assets “live” (e.g., ETFs).

New client segments are growing while others are shrinking, changing the nature, size, and duration of flows. We see a rise in quant strategies and multi-asset funds — both in terms of AUM and traded volume share. We see significant differences in regional market structures in terms of market cap, exposures (U.S. tech economy vs. old European economy and value), and liquidity.

It could be argued that the market now trades on a much shorter time horizon than before.

Reactions are quicker, more reflexive, and built more around signals, positioning, and flows than around fundamentals… at least in the short term… and yet, our equity trading styles remain focused on the concept of “agency trading.”

The idea that the price on the screen on a Tuesday at 9:13 AM is a fair reflection of true asset value and the right benchmark for making a trade.

In other asset classes… “agency” was never “a thing.”

In many FICC products, the entire flow logic revolves around risk transfer. Request a price, trade risk, transfer risk, manage risk. There’s no real concept of “passivity” or readiness for “patience.” Meanwhile, in equities… working orders and agency crosses still dominate workflow.

The reality is, the concept of “no impact” is an illusion.

Every order has impact and signal. The only question is — how much? Markets are increasingly focused on explicit costs, understandably so, but this can obscure implicit losses. If there’s a working order being executed over two weeks… what’s the leakage…