September 30, 2019 BARRON’S M5
the strength of Wells Fargo’s franchise, with
its sprawling national footprint, should give
him the ability to drive a laggard among the
big banks back toward the front of the pack.
For patient investors, Scharf’s task
ahead presents an opportunity. Wells Fargo
stock trades at just over 10 times its last 12
months’ earnings, almost identical to Bank
of America’s valuation and Wells’ lowest
multiple since the fake-accounts scandal
broke. Getting the asset cap lifted would
provide a huge boost to the stock.
That job, to be sure, will require much
delicate scalpel work, and doing it from afar
might raise some hackles on the West Coast.
But given that Wells Fargo has already tried
twice to fix its problems with a company
man, a little bit of a culture clash now is
probably a good thing. —BENWALSH
Don’t Blame Market Makers
Whenever markets suffer a bout of volatil-
ity, someone blames high-frequency trad-
ers. In the bumpy last months of 2018, U.S.
Treasury Secretary Steven Mnuchin urged
a government investigation of high-speed
trading. After the recent August chop,
some said the exit of traditional dealers
from market-making had hurt stock-trad-
ing liquidity.
And when someone blames high-fre-
quency traders for causing market volatility,
the data nerds at Citadel Securities fire up
a study. Citadel’s latest study examines
whether stock-trading liquidity on ex-
changes has declined and aggravated the
market’s mood swings. The firm concludes
it has not.
The stock market’s structure has certainly
changed with the rise of trading algorithms,
electronic market-making, and new invest-
ment products, acknowledges Gregg Berman,
Citadel’s market analytics chief. “So has the
amount of liquidity changed?” he wonders,
rhetorically. His answer: “Liquidity has basi-
cally remained constant.”
Citadel Securities is the market-making
business started by hedge-fund manager
Ken Griffin. Its ears have been burning
ever since Michael Lewis cast it as a villain
in Flash Boys. More-careful examinations
disproved Lewis’s claim that computerized
market-making hurts investors, but his
book’s popularity left a sting.
Using data feeds and computing power
unavailable to almost anyone else, Citadel
looked at the order books of the 13 U.S.
exchanges for all of the stocks in the S&P
500 and the Russell 2000 indexes at 10-
second increments since mid-2011.
In a liquid market, traders can buy or
sell their desired amount of stock without
the order moving the price much. Most li-
quidity studies never look beyond the top of
an exchange’s order book, where it shows
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the number of shares available at the best
bid or offer price—the quote. Citadel’s com-
puter muscle allowed it to look deeply in the
order books, where additional liquidity is
available at slightly wider spreads to fill
bigger orders. That makes its study one of
the first to look at the liquidity available to
complete institutional trades worth millions
of dollars.
For the stocks that comprise the two
indexes, liquidity on exchanges has remained
stable in the past eight years, says Citadel.
The spreads at which traders could complete
trades of $1 million and $10 million stayed
constant, remaining unperturbed even in pe-
riods when the Cboe Volatility Index, or VIX,
spiked. For giant orders of $100 million
worth of stock, Citadel found that spreads
would have varied with jumps in the VIX,
but the range of liquidity was the same over
the long term.
The study also looked at liquidity trends
for six individual stocks, including giants
like Apple (AAPL) and Microsoft (MSFT).
It confirms what has been reported here
and elsewhere: Shrinking spreads in the age
of computerized market-making make it
cheaper to trade the small orders of retail
investors and institutions.
The story is different for large orders.
The spread to complete a $1 million order
for the stock of Microsoft or Bank of
America hasn’t fallen at the same pace as
the quoted spread for a small order. This
could be a reason that some buy-side trad-
ers aren’t fans of computerized market-
making.
But on closer examination, the Citadel
data show that the cost to execute million-
dollar trades of those two stocks has declined
over time—just not as much as it has for the
little guy. Even for orders worth $10 million,
spreads have remained about the same.
“When you add it all together,” says Berman,
“liquidity is equal or better than before.”
—BILLALPERT
Industry Action
Performance of DJ U.S. Ind, ranked by wkly % chg.*
Utilities 1.21%
Consumer Goods 1.16
–0.25 Financials
–0.45 Industrials
–0.86 Telecommunications
–1.51 Basic Materials
–1.61 Technology
–1.62 Consumer Services
–2.78 Oil & Gas
–3.29 Health Care
*ForbreakdownseepageM36. Source:S&PDowJonesIndices
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