TRADING THE WEEK: Low Vol Plagues Market

Ho hum.

Trading in the equities mart was quite subdued amid a backdrop of more important headline events, such as the release of audit trail costs, new Securities and Exchange Commission Chairman Jay Clayton’s first official appointment of his tenure and France’s election of a new president. Market talk centered on the continued dearth of volatility and the lack of trading opportunities present.

Last week the Dow Jones industrial average and the Standard & Poor's 500 index recorded fractional falls ending th week on a low note. Ona lone high note, the Nasdaq composite broke its record for the 30th time since the start of the year, closing at 6,120.59 last Tuesday. At these levels, traders said the market appears stuck and that a major geopolitical or policy event, such as the long-awaited Trump tax plan, would be needed to jump-start trading amid the current low volatility environment.

Volatility, as measured by the VIX, has hovered around the 10 level for the last three weeks. It peaked on April 13^th at 15 but has stayed within close proximity of the 12-13 level since last November.

“No volatility has translated literally into no trading,” said one floor trader in New York. “The market looks range-bound – but there is little pressure to the downside as a lack of new issuance and investor conviction about bonds has investors sidelined.”

Trading this week reflected the lack of interest in the market as volume dropped to the 6.67 billion level from the week prior when volume was 7.08 billion shares for the week ended May 5, according to Bats Global Markets. Three weeks ago volume was a more healthy 7.11 billion shares.

In other market news, Bats has launched an alternative to the closing auctions on the primary listing exchanges. Pending SEC approval, Bats Best Market Close (BMC) will accept Market-on-Close (MOC) orders for non-BZX listed names from 6:00am to 3:35pm ET, pairing off orders based on time priority. The orders will be matched at 3:35pm ET, with any unfilled portion of the orders canceled back to allow participation in primary exchange closes. We expect Bats BMC pricing to be aggressive – possibly free to start, and certainly much lower than the current closing auction pricing on NYSE and Nasdaq (currently ~8-16 mils).

Also, the first exchange filing of fees for the Consolidated Audit Trail (CAT) is out. Brokers will bear 75% of the fees and exchanges/ATSs 25%, with allocations to be made by message traffic for brokers and by volume for venues. CAT is expected to cost $50m in year 1, dropping to $37m/year thereafter. Amongst other nuggets, the filing proposes an annual fee of roughly $400k for Tier 1 brokers and $250k for Tier 1 venues. Organizations with multiple brokers and/or venues pay a la carte; the filing estimates that the biggest individual organizational charges will be $1.9m/year for an exchange holding company and $0.9m for a large broker.

Thirdly, it was reported that the Financial Industry Regulatory Authority's own order audit trail system – OATS -will be shuttered. Oats data feed depends on confirmation of data accuracy of the yet-to-be-constructed new consolidated audit trail system. FINRA expects a gradual wind down of OATS,, likely over the next two years, according to statements made by the agency’s own William Wollman at the SIFMA Ops conference in Boca Raton, Fla.

Lastly, SEC Commission Jay Clayton hired William Hinman, a retired partner of Simpson Thacher & Bartlett, to be director of the agency's Division of Corporation Finance.

This Week’s U.S. Economic Indicators of Interest: