The largest plummets of stock prices and the highest leaps in modern history were witnessed during the last couple years because of the well known Covid-19 Virus peek. Therefore, existing Beta values and economic theories might be even relevant.
Dark pools, for example, which are trading venues that lack pre-trade transparency, are often suspected of causing difficulties with price discovery, and of adversely affecting market quality. After researching, it came to our notice that COVID-19-induced the volatility on trading in dark pools. Increased volatility is found to be linked with an economically significant move of market share between dark pools and lit exchanges.
According to Ibikunle and Rzayev (April 2020), theory suggests that dark trading dynamics are driven by volatility in the lit market. Zhu, as one of the influential theoretical contributions on dark trading, predicts a nonlinear relationship between volatility and dark market such that uninformed traders are more attracted to the dark pool while well informed traders concentrate on lit exchanges due to the higher probability that their trade will not be executed in the dark pool.
When volatility exceeds the required level to avoid dark pool trading, informed traders begin to transfer their trading activity to the dark pool, searching for the uninformed traders to trade with and to avoid any widening exchange spread and increase their profits. However, this could result in liquidity constraints in the lit market and consequently, the uninformed will migrate back to the lit exchange, Ibikunle and Rzayev (April 2020)
Finally, we have seen that there may be fluctuations in where liquidity exists and how trades are executed under extreme market volatility like a brought on global health crisis. The perceived risk associated with different economic sectors can lead traders into modifying their trading strategies such as the increased or decreased use of Dark Pools explained above. Timely information regarding any liquidity movement among venues can help clients optimize profits and save money during periods like this.
Behind that stance is the assumption that there is a painless solution for every problem, rather than making catastrophic choices amid unavoidable uncertainty, yet, it is a must that investors remain disciplined under such circumstances.
- Mirna Baydoun
