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In the last couple of days the liquidty dramatically decreased at some instrument I follow. I mean the depth of this markets are only its fractions compared a week ago. /Of course in the same time the volatility has increased a lot/
I am talking about: ZN / ZB / FGBL / FESX / ES
If somebody could explain it why that would be great!
Well if the volatility is something like 4 times more than usual, I wouldn't keep my size the same and take 4 times more risk. And when there is more volatility and uncertainty, it's also more easier to get trapped by headline or big player etc. so it's just risk management to offer/bid less imo.
Thursday (today): liuqidity running at 238 % of average of the last 26 weeks
Wednesday: liquidity running at 318% of average over the last 26 weeks
Tuesday: liquidity running at 194% of average over the last 26 weeks
Monday: liquidty runing at 63% of average over the last 26 weeks
ZB:
Thursday (today): liuqidity running at 226 % of average of the last 26 weeks
Wednesday: liquidity running at 345% of average over the last 26 weeks
Tuesday: liquidity running at 171% of average over the last 26 weeks
Monday: liquidty runing at 44% of average over the last 26 weeks
ES:
Thursday (today): liuqidity running at 217 % of average of the last 26 weeks
Wednesday: liquidity running at 331% of average over the last 26 weeks
Tuesday: liquidity running at 216% of average over the last 26 weeks
Monday: liquidty runing at 227% of average over the last 26 weeks
FGBL:
Thursday (today): liuqidity running at 199 % of average of the last 26 weeks
Wednesday: liquidity running at 253% of average over the last 26 weeks
Tuesday: liquidity running at 156% of average over the last 26 weeks
Monday: liquidty runing at 95% of average over the last 26 weeks
FESX:
Thursday (today): liuqidity running at 265 % of average of the last 26 weeks
Wednesday: liquidity running at 306% of average over the last 26 weeks
Tuesday: liquidity running at 205% of average over the last 26 weeks
Monday: liquidty runing at 193% of average over the last 26 weeks
I conclude that the volume that can be observed this weeks is about 2 times to 3 times higher than normal. This week's volume is actually the highest volume since October 2011. Markets are struck with panic, investors are driven by fear, stocks have lost 10% over the last weeks.
I have not paid attention to market depth, because I am not an order book trader. But I believe that many high frequency traders engage in counter trend trades which only work when the markets stay calm. The algorithms may switch off, when volatility gets too high. Anyhow, I would not call those orders showing in the order book liquidity, but I think those quotes are just something between parasites and freeriders, not reflecting real liquidity.
There are several ways to measure liquidity. I usually only look at volume, as transactions show me whether there are buyers and sellers. Another way of measuring liquidity would be to look at market depth. However, quotes may be cancelled before orders are executed.
During this week, with volatility being relatively high, the order book may have been more widely spread than usual. However, I would not call a market illiquid that shows 200% to 300% of the average volume. It is just possible that some of the usual free riders are scared and stay away.
There is a misunderstanding here and the reason of it that we measure and define liquidity in different ways.
this is from invetopedia:
DEFINITION of 'Liquidity'
1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.
How I interpret this: in a rising market how much sell limit order must be bought at each price level in order to advance price further.
So I measure liqudity by volume at price levels during a period of time instead of only volume.
This is why I prefer range chart.
I attach 2 charts to show how dramatically increased volatility in the last 2 days dut to lack of liquidity.
When I am writing this the average of limit orders in ZN around 400, Monday it was 1700 in the same time..
looks like that the majority of market makers left and that makes markets more noisy and unpredictable.
Still don't know why, and how long will this last.
