Volatility spikes and market quality resiliency since August 2024
When the "fear index" spikes, we no longer have to be afraid for European market quality
This report focuses on the volatility spikes triggered by global economic events at the beginning of August 2024 and their impact on market quality. It highlights the exchange’s role in ensuring efficient price formation during periods of market turbulence, with an analysis of key market quality indicators, showing Euronext’s superior stability and performance amid increased volatility.
Executive summary
- Macroeconomic context: Spikes in volatility across global equity markets at the beginning of August 2024 were driven mainly by (a) the higher-than-expected unemployment rate in the US and (b) the Bank of Japan's decision to raise interest rates for the second time since 2007. These announcements followed the short-term volatility spike in July after elections in France.
- Volatility figures: On 5 August 2024, the volatility indices in the US (VIX) and Europe (VSTOXX) reached their highest levels respectively since the Covid pandemic in March 2020 and the Ukraine-Russia geopolitical crisis which started in March 2022.
- Market quality: Analysis of the recent volatility spikes in August 2024 shows that Euronext maintained stronger market quality than alternative venues, given (a) its crucial role in the price formation process, and (b) efficient liquidity programmes. Market participants in Europe have become more resilient in responding to volatility, and they prioritise Primary Exchanges as a ‘safe haven’ during market turmoil.
Methodology
- Market quality metrics are analysed for the main Euronext Indices. Trading venues considered are Euronext, Cboe Europe (Cboe), Aquis Europe (Aquis), Turquoise Europe (Turquoise).
- Volatility is evaluated using the VSTOXX® Index (V2TX), which measures the volatility of the EURO STOXX 50 Index.
- The market quality data in this study is sourced by the independent providers BMLL Technologies and BigXYT. Three metrics are analysed:
- Average Spread: the mean bid-ask spread of the day, given in basis points relative to the mean mid-point price.
- European Best Bid & Offer (EBBO) Setting: The number of events where a venue improved the consolidated best ask and bid price, as a percentage of the number of all consolidated ask and bid price improvement events for the instrument.
- Liquidity at Touch: The time-weighted average amount of notional around at the BBO.
- Exclusive EBB Presence by Role: The classification of an exchange's role when exclusively at EBB. It can either improve the best bid by setting a new best price (active setter) or maintain its price as all other venues’ BB worsens (passive lagger).
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