Navigating Trading During the Q2 Sell-Off1
By: Patrick Dote, Head of Research, IntelligentCross
Key Takeaways:
  • Heightened volatility in Q2 2022 has widened spreads and made quotes less stable, thereby increasing the implicit costs of trading.
  • However, the availability and relative quality of intraspread liquidity—including midpoint—has remained consistent while savings in basis points has increased.
  • Talk to your broker about how they configure their algos, and if they would consider overweighting intraspread order placement as a possible way to reduce trading costs.

A Volatile Trading Environment

Q2 2022 began with a significant spike in volatility. The VIX jumped 61% between April 1 and May 13, while the S&P 500 dropped 11% during the same period.2 This volatility has widened spreads and decreased post-trade quote stability by more than 40% market-wide.

The Impact on Spread Capture

Capturing spread with passively priced orders has become more difficult as the markets have become jumpy and directional. Overall, we have seen the magnitude of intraday directional moves increase, and a decrease in both the number of trades at a given bid or offer necessary to take that level out and the time between a new NBBO and a trade priced at the contra-side. Together, these suggest increased exposure to signaling risk when trying to capture spread.

With fewer passive orders filled, algos need to catch up more often. And they are are catching up by paying a higher spread cost and—even worse—a new price level more frequently.

Challenges for Trading

Increased spread costs and volatility kill benchmark algo performance. We estimate that median slippage for all-day VWAP increased almost 40% since the beginning of April, using a simple historic volume curve model.

POV and implementation shortfall strategies also suffered during this period. The absolute magnitude of intraday price moves over 5-minute periods was up more than 45% since the start of the quarter, and the likelihood of a 3 standard deviation price and volume surprise occurring together in the same 5-minute window was up 16%.

How to Trade It

The good news is that with all this mess, the amount of volume trading within the spread versus trading at the bid and offer has remained constant.

Importantly, but not surprisingly, the basis point savings of intraspread liquidity versus the full spread has increased as spreads have widened. Savings have increased by just over 1.2 bps.

The other good news is that the quality of intraspread liquidity remains solid in comparison to liquidity at the touch. Midpoint executions continue to have the highest post-trade quote stability market-wide, and near-touch liquidity is just as likely to signal momentum as trades at the touch. This means that the spread savings are real, and not the top tick of a soon-to-be-reverting market.

On our own platform, IntelligentCross, we find that the risk of hunting for intraspread liquidity versus missing an opportunity to take has not changed much since the beginning of Q1 2022. The far side NBBO remained stable or better 90% of the time in Q1 versus just over 88% in Q2, up to 100ms for IOC orders priced within the spread—including mid—that went unfilled. The orders remained marketable 95% of the time in both quarters.

In Conclusion

When the ability to capture full spread declines but the availability of intraspread liquidity doesn’t—while both the cost of catching-up and the savings of intraspread increase—shifting more flow to intraspread order types and destinations pays dividends. This may not be true in any highly volatile market, but it is true now.

Bottom line, to trade better during the current craziness, talk to your broker about how they handle capturing intraspread liquidity, including how they can walk multiple levels for you before going to the far side.

Patrick Dote is Head of Research at IntelligentCross, where he leads development of the ATS's models for matching engine calibration. Before joining IntelligentCross in 2018, he was Head of Quant Execution at the Clinton Group for more than a decade. He is a graduate of Stanford University.

1. The universe for this piece is the top 1000 NMS traded names above $1, ex-ETFs, 4/1/22-5/13/22.
Federal Reserve Economic Data | FRED | St. Louis Fed (
Percentage change in microsecond duration until next quote change after SIP trade