Let's get to the big story breakdown. While stock trading volumes look massive on paper, but beneath the surface, actual market liquidity is hiding a problem. While average daily volumes have surged nearly 60% this year. The actual depth of liquidity available to institutional investors in the S&P 500 recently dropped to its lowest level of the year.
Now, investors are heading straight into two major catalysts, and that is the high stakes Senate vote on the Clarity Act, followed by Wednesday's September Fed rate decision. Joining us to make sense of this shifting landscape is Jeff O'Connor, U.S. head of market structure at Liquid Net, a buy side liquidity network focused on institutional trading.
Jeff, great to have you here. Thank you so much for joining me.
Thank you.
Well, here we are. We are counting down to the Senate cloture vote. And we also have the fed reserve rate decision tomorrow. So both looking at stock market volume. What story is it really hiding. And tell us what's happening when it comes to liquidity.
You know it's funny at liquidity we've got a member base of 1200 clients. So this is all this all comes from discussions, and that's where we kind of rooted root for the purpose of our of our note. But when we look at equity volumes, equity volumes in the past few years have jumped, like you just said, about 60%.
I think that kind of belies actually what the true institutional liquidity is. There's a lot of market making volume out there. There's a lot of there's a lot of concern about the macro environment, which impacts how traders and pans get in and out of positions. And we talk a lot about market health. And I'm not necessarily talking about equity performance.
I'm talking about trading conditions. What are the spreads. What are the depth of books and stuff like that that our clients are very much interested in?
Yeah. And Jeff, I do want to expand on that, especially because you mentioned depth. And 2026 has been quite the volatile year when it comes to the broader markets. So what should viewers out there know about institutional investing and what's happening right now?
I mean, I think right now the macro concerns are so great. Obviously we've had this rates reprice. We're trying to digest that a generation of easy borrowing is probably going away. We're going into the FOMC meeting tomorrow. And all of that impacts the conviction and the urgency that portfolio managers and traders are going to have at traditional institutional money management firms, and that impacts the way that they view the market and the way that they're going to try to get in and out of what is a very fragmented and complex equity market.
And when we're here at the New York Stock Exchange, we're looking at a lot of volume here on a regular basis. But when it comes to the regulatory landscape and the discussions taking place over in D.C., what are you focused on right now and why?
Well, there's a lot of hot topics on the market structure front, but front and center right now is the order protection rule, where the SEC has put a rule proposal out to fully rescind the order protection rule. And honestly, that would probably be the biggest market structure change that we've seen since 2005.
Reg NMS was implemented and this was a big component of it. Now. It did a lot to establish the credibility of the NBO, but it also did a lot to increase the complexity and the fragmentation of the equity marketplace. So I think the consensus out there is that a lot of it has run its course, and it does deserve to kind of be somewhat revisited.
But the full rescind that the SEC has proposed is kind of scary. And everyone's scared that the NBO is going to be compromised because of it.
Yeah. And Jeff, while I have you here, non-bank market makers are playing a larger role in this space. So tell us what's happening below the surface.
Yeah. I mean, it's funny, like I mentioned, volumes up almost 60% year over year. Consolidated total volumes on the on the tape on a daily basis in the US markets is a crazy move. Biggest move that we've ever seen. However, 50% of that marketplace is now coming from non-bank market makers. So that's an area of the market where we have to be very cognizant of how our clients are interacting with them, when are they doing it, at what urgency and what tactic that they're using.
And we as a broker dealer need to navigate that, that complexity for them. But certainly what I think is notable in the past couple of years is that the appetite from the buy side has been this liquidity is there. It's pervasive in the marketplace. We need to interact with it, and we need to interact with it smartly, and we've got to find the right way to do it and when to do it.
Yeah. And Jeff, you and I are heading into the final weeks of the third quarter here, and that means we're counting down to year end. And between here and the end of the year, we know it's a midterm election year and we have the fed decision coming up. But a lot could happen when it comes to the macro as well as the fundamental outlook.
So what are the biggest liquidity risks that you're paying attention to?
I think the biggest risks right now are going to be this, this air of uncertainty that's going to prevail as we head into a rising rate environment, which is something that we're very much not used to. And then on top of that, that's going to coincide with earnings. Yep we're right. Third quarter earnings which have been so robust.
If there's any crack there that's really been kind of the Bowie for the for the US equity market in the face of all this macro uncertainty. And then we go into the midterm elections. So all of that's going to kind of heat up together. I think third quarter earnings will start. The big banks will probably start mid October.
And then there we are beginning of November at the midterm elections. And all of that coming together is going to be there's probably a lot of volatility that's waiting to to rise to the surface for sure.
Yeah. And you mentioned a key word there. And that is volatility. That is something that we've seen so much of in 2026. So how does volatility play into the equation.
It's funny I think it's suppressed I think that the equity market hasn't caught up to the volatility that we're seeing in the Treasury market. It wasn't enough to draw draw traders and PMS back to the desk late August, where we saw a downdraft in volumes. But I think once we get through the FOMC decision tomorrow, that's going to change.
And the volatility that's kind of been hiding under the surface is ready to come to the surface.
Yeah. And Jeff finally before I let you go. The report that was recently released it has a lot of key data points. But what are the key takeaways and what do you want viewers to know.
I just I would like again we do this from the feedback from our institutional client base. It has become a difficult market to navigate. Trade sizes are dropping. A lot of that is due to macro conditions and that can shift as macro conditions get better. That's more of a cyclical change. But the structural change is in place.
These market makers that are interacting in the marketplace. So we need to help our clients interact all different situations, all the different environments and have unfettered access to all the liquidity providers.
Yeah. Jeff, this is an important discussion, especially at a time when we're seeing so much volatility as well as uncertainty. So I appreciate your time. Thank you so much for joining me. Thanks for having me. Thank you.
