Lately, stocks have given traders one more reason to have a headache at this time of year. In fact, November is shaping up to be the third highest month of the year for daily number of stocks subject to the alternative uptick rule. If you’re planning to trade in a battered symbol, what should you do to avoid getting beaten up yourself? We dug into the data, and here’s what we learned.
When the Uptick Rule Kicks In
As a quick refresher, the alternative uptick rule restricts short selling to prices above the current bid in stocks that experience a drop of 10% or more from the prior day’s close. While this restriction applies to the balance of the trading day, it generally continues through the next.
Lately, stocks have given traders one more reason to have a headache at this time of year. In fact, November is shaping up to be the third-highest month of the year for the daily number of stocks subject to the alternative uptick rule. If you’re planning to trade in a battered symbol, what should you do to avoid getting beaten up yourself? We dug into the data, and here’s what we learned.
As a quick refresher, the alternative uptick rule restricts short selling to prices above the current bid in stocks that experience a drop of 10% or more from the prior day’s close. While this restriction applies to the balance of the trading day, it generally continues through the next.
That ‘follow-on’ day is where we focused our study. And we learned that these days behave quite differently from unrestricted days. Understanding the differences helps more effectively source liquidity.
For example, volume in the mornings of follow-on days tends to be a greater percentage of the day’s trading than on unrestricted days, with the important corollary that volumes towards the end of the day tend to be less of a percentage. This is important for VWAP trading based on historical volume curves, especially when implemented on short sale orders that have additional price limit friction.
It’s not just the shape of the intraday curve that changes, it's also where within the spread trades occur. While the shift away from later afternoon liquidity seems to be true across all stocks, different but distinct patterns emerge among security types regarding price location.
ETFs tend to trade less at the touch starting mid-morning as intraspread volumes pick up versus unrestricted days, while large cap stocks trade more in the mid than usual across the full day. Surprisingly, smid-cap names are slightly more active at the touch but less so intraspread.
Regardless of security type, the market share of maker-taker venues tends to decline while FINRA-reported trades increase. Inverted venues show some evidence of greater activity towards the end of the day – perhaps reflecting alternative urgency for orders unable to hit the bid as they fall behind algo schedules.
Trading in these situations isn’t for the uninitiated. Without adjusting volume curves and routing maps, liquidity won’t be where you expect it. Arm yourself with information as you plan your trades, and ensure you have the right execution partners and destinations.
About the Author
Patrick Dote is Head of Research at IntelligentCross, where he leads development of the ATS's models for matching engine calibration. Before joining IntelligentCross, he was Head of Quant Execution at the Clinton Group for more than a decade. He is a graduate of Stanford University.