14 June 2013 Volume 4 Issue 6 The Blotter presents ITG s insights on complex global market structure, technology, and policy issues. Contributors Konstantin Tyurin Director ITG Analytics konstantin.tyurin@itg.com +1.617.692.6737 Jing Cheng Researcher ITG Analytics jing.cheng@itg.com +1.617.692.6594 contact Asia Pacific +852.2846.3500 Canada +1.416.874.0900 EMEA +44.20.7670.4000 United States +1.212.588.4000 info@itg.com www.itg.com Canada Intraday Volume Profiles It is important to have accurate intraday volume distributions for efficient order execution. In this report we review the new intraday volume profiles created by ITG Financial Engineering for Canadian securities, including cross-listed stocks, ETFs and several other types of exchange traded instruments. Notably, the ETFs tend to have distinct profiles from equities, mirroring the unique features of their underlying baskets. The new intraday volume profiles combine intelligent grouping and smart noise reduction techniques to obtain stable stock-specific profiles for all securities. ITG Logic and ITG Algorithms for Canadian securities will have this intraday volume profile information in near future. The new intraday volume profiles product has several advantages: The new profiles for individual names are more stable over time yet retain unique stock-specific features. The coverage is extended from the members of the S&P TSX Composite index and the USA/Canada cross-listed names to a broader universe of common stocks, ETFs and several other types of exchange traded instruments. The intraday volume profiles play an important role for efficient order execution since many popular trading tools such as the volume-weighted average price (VWAP), participation rate (PWP) or implementation shortfall (IS) algorithms require them as key inputs. The U-shaped intraday volume pattern is a stylized fact well documented for various markets and largely unrelated to the trading mechanisms in individual markets. The market microstructure theory identifies several factors contributing to elevated trading volumes at the beginning and the end of a trading session. For example, informed traders tend to trade more in the opening hours as they attempt to profit from the information accumulated overnight and during the pre-opening session. On the other hand, traders attempting to reduce the risk of carrying large inventory overnight tend to close their positions before the market is closed. Since the Canadian markets are closely linked to the US markets and share the trading hours and many other microstructure characteristics, the average intraday volume profiles for most Canadian securities are similar to those listed in USA.
14 June 2013 Volume 4 Issue 5 2 In this note, we present the new intraday volume distributions product for Canadian stocks, which provides stock-specific yet stable profiles for equities and other security types such as ETFs and REITs. Approximately 3,000 securities are covered. We distinguish between five alternative types of securities for Canada: Securities that are cross-listed with USA ($1058.9 billion/year, 58.4% of overall trading volume); ETFs ($162.5 billion/year, 9% of overall trading volume); CEFs (closed-end funds) ($5.67 billion/year, 0.3% of overall trading volume); REITs ($37.7 billion/year, 2.1% of overall trading volume); Common stocks ($547.3 billion/year, 30.2% of overall trading volume). At the first step, we utilize one year of intraday volume data to obtain the raw security-specific intraday volume profiles as well as the group volume profiles for each security type and liquidity group. The group volume profiles are calculated by averaging of raw security-specific intraday volume distributions for stocks in the same group. At the second step, the final security-specific intraday volume distribution is generated for each Canadian security as a weighted average of its raw security-specific profile and the group profile for the corresponding group obtained at the first step. The weight assigned to the group profile is positively related to a measure of instability of the corresponding raw security-specific profile that is calculated dynamically for each Canadian stock. The final profiles yield the estimates of the percentage daily volumes traded in 15-minute intervals during the regular trading hours, as well as at the market-on-open () and market-on-close () auctions. The introduction of group profiles and weight factors allows us to achieve stability of the final intraday profiles for all stocks while retaining as many stock-specific features as possible. Figure 1 provides examples of intraday volume profiles for two securities with different instability metrics of their raw security-specific profiles. For ticker SBL (Santa Barbara Resources Ltd), which is a relatively illiquid common stock, the raw security-specific distributions vary quarter by quarter. As a result, the final intraday volume profile for this ticker relies more on the group profile due to the larger value of its instability metric. For the more stable ticker HOD (Horizons BetaPro NYMEX Crude Oil Bear ETF), which is a very liquid security, the raw securityspecific profiles are nearly identical across different quarters. The value of our instability metric is small, and the shape of the final intraday volume profile for this name is driven mostly by its stock-specific features.
3 FIGURE 1: Intraday Volume Profile for HOD Liquid ETF 0.00 Intraday Volume Profile for SBL Less Liquid Common Stock 0.40 0.35 0.30 0.25 0.20 0.15 0.05 Raw_Security_2013 Q1 Group_2013 Q1 Raw_Security_2012 Q4 Final_2013 Q1 Raw_Security_2012 Q3 As was observed in [1], there is no one-shape-fits-all intraday volume distribution profile for US-listed equities or ETFs. This is also true for Canadian equities and ETFs. Many ETFs have distinct features in their volume profiles due to the nature of the instruments tracked by their underlying baskets. For example, the intraday volume distributions for tickers HNU (Horizons BetaPro NYMEX Natural Gas Bull Plus ETF) and HOU (Horizons BetaPro NYMEX Crd Oil Bull Plus ETF) have volume spikes shortly before the closing of the open outcry session at 2:30pm, while ticker HZU (Horizons BetaPro COMEX Silver Bull ETF) exhibits a spike shortly before 1:25pm when the open outcry session for silver ends. Figure 2 shows the intraday volume profiles of tickers HNU and HZU along with those for the US-listed names UNG (United States Natural Gas) and SLV (ishares Silver Trust), the US-listed exchange traded funds tracking the baskets similar to those of their Canadian counterparts.
4 The estimated intraday volume profiles for the Canadian ETFs match closely those of their US-listed counterparts, as both display volume spikes at the same times of the day. However, the auction volumes for Canadian ETFs tend to be much lower than the volumes for similar US-listed ETFs 1. FIGURE 2: Natural Gas ETFs, 2013Q1 0.07 0.05 0.03 0.01 Silver ETFs, 2013Q1 CAN_HZU USA_SLV Figure 3 compares the final security-specific intraday volume profiles in the first quarters of years 2011, 2012 and 2013 for two Canadian common stocks, one of which is a very liquid name (BNS: Bank of Nova Scotia) and the other is a less liquid name (IMZ: International Minerals Corporation). The shapes of the displayed intraday volume profiles are relatively stable over time even for less liquid names. 1 In USA, one can effectively trade an ETF in the auction at or near its NAV because of the market makers. In Canada, the book is a blind book that accepts offsetting limit orders up to the size of the imbalance. Hence, trading at in Canada is intrinsically more risky for NAV targeting investors.
5 FIGURE 3: BNS, Liquid Cross-Listed Stock IMZ, Less Liquid Common Stock 0.16 0.14 2011 Q1 2012 Q1 2013 Q1 Besides the fact that the percentage of daily volume traded at the marketon-open () auction is generally lower for more liquid securities, while the percentage of daily volume traded at the market-on-close () auction is higher for more liquid securities, we observe yet another clear trend pertaining to the percentages of daily volumes traded in Canadian markets at and and during the time periods shortly after the opening and before the closing of the daily continuous trading. Figure 4 shows the average estimated percentage volumes at combined with the first 30 minutes of continuous trading immediately after (9:30 to 10:00 am EST) and the average estimated percentage volumes at combined with the last 30 minutes of continuous trading prior to (3:30 to 4:00 pm EST) for each liquidity group in years 2011, 2012 and 2013, for all Canadian common stocks.
6 We observe a weak but pervasive general trend of the declining percentage of daily volume traded in the beginning of the day ( and the first 30 minutes of continuous trading) and the increasing percentage of daily volume traded at the end of the day ( and the last 30 minutes of continuous trading). FIGURE 4: Trend in Early Trading and Late Trading for Canadian Common Stocks 0.30 0.25 0.20 0.15 0.05 $0.16 $0.80 $3.20 $8.82 $24.03 $51.58 $125.23 >$125.23 Average daily trading volume (in millions) EarlyTrading_Y2011 Q1 EarlyTrading_Y2012 Q1 EarlyTrading_Y2013 Q1 LateTrading_Y2011 Q1 LateTrading_Y2012 Q1 LateTrading_Y2013 Q1 [1] M. Borkovec, K. Tyurin, X. Sun, Intraday Patterns of Trading Volume Distributions: One Share Doesn t Fit All, ITG Working Paper, October 2009. 2013 Investment Technology Group, Inc. All rights reserved. Not to be reproduced or retransmitted without permission. 61213-17736 The opinions, positions, and/or predictions taken or made in this document reflect the judgment of the individual author(s) and are not necessarily those of ITG. These materials are for informational purposes only, and are not intended to be used for trading or investment purposes or as an offer to sell or the solicitation of an offer to buy any security or financial product. Nothing contained herein should be relied upon as a representation, guarantee, or warranty as to the reasonableness of the assumptions or the accuracy of the sources used by the author(s). These materials do not provide any form of advice (investment, tax or legal). ITG Inc. is not a registered investment adviser and does not provide investment advice or recommendations to buy or sell securities, to hire any investment adviser or to pursue any investment or trading strategy. All trademarks, service marks, and trade names not owned by ITG are the property of their respective owners. Certain Index Data contained herein is the property of MSCI. Copyright MSCI 2013. All Rights Reserved. Without prior written permission of MSCI, this information and any other MSCI intellectual property may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. This information is provided on an as is basis, and the user of this information assumes the entire risk of any use made of this information. Neither MSCI nor any third party involved in or related to the computing or compiling of the data makes any express or implied warranties, representations or guarantees concerning the MSCI index-related data, and in no event will MSCI or any third party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any use of this information. The Frank Russell Company is not affiliated with ITG. Russell is a trademark of the Frank Russell Company. The Russell 1000, Russell 2000, and Russell 3000 indices are trademarks of the Frank Russell Company. Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of ITG. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in ITG s presentation thereof. Standard & Poor s and S&P 500 are trademarks of the McGraw-Hill Companies, Inc.