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Liquidity indicator?


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Liquidity indicator?

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  #1 (permalink)
Gothenburg
 
Experience: Advanced
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Trading: Nasdaq Stocks, no futures
 
Posts: 48 since Mar 2016
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Hey, i wonder if someone know any cool or smart way of looking at liquidity? Bid/ask spread can reveal it, big spread = illiquidity.
IV can also reveal it, high IV = Illiquidity.

But i want to trade some small cap stock which dont have options contract and therefore no IV, i also think looking at inside bid/ask
is inacurate because sometimes it change to fast.


So do you guys know any cool way looking at liquidity to find out if it dries up and geting extremely low?,(thatīs the market condition
i try to catch.
Beta value is calculated on past movement right? I once considered it but if itīs just historical itīs no good.

Thanks in advance,
/Dave.

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  #3 (permalink)
Gothenburg
 
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Thank you for reply,

I want to trade small cap stocks, and some of them dont have options and implied volatility (IV) are calculated from options so it would not work

But thank you,

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  #4 (permalink)
Houston
 
 
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You can see liquidity simply by looking at the volume and like you said, bid/ask spreads.

If you're looking to create some sort of leading indicator then I would use Open interest on futures/options closely correlated with the small cap market you're trading. Create some sort of ratio based indicator on Open Interest relative to volume of the small cap stock.

If OI/Vol is high, means participants are digging in and liquidity is low. If OI/Vol is low, means market has less consensus and is trying to find the right levels, which results in a highly liquid market.

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worldbfree View Post
You can see liquidity simply by looking at the volume and like you said, bid/ask spreads.

If you're looking to create some sort of leading indicator then I would use Open interest on futures/options closely correlated with the small cap market you're trading. Create some sort of ratio based indicator on Open Interest relative to volume of the small cap stock.

If OI/Vol is high, means participants are digging in and liquidity is low. If OI/Vol is low, means market has less consensus and is trying to find the right levels, which results in a highly liquid market.

Hey, thanks for answering. I start to believe that the best way is to look at bid/ask spread. but, iīm confused. do you (or maybe someone else who see this) think itīs enough to just look at the difference between best bid and best ask that i marked with red circle.



What if it is a big spread between best bid and ask but then a lot of liquidity at 29.37.....29,38 etc on ask in this example (picture) or is that impossible if the spread between best bid and ask is big? i mean can we assume that the whole market will be low liquid just by looking at inside bid and ask spread (spread between best bid and best ask)?

I know itīs not a very big spread in picture, but itīs just example.

Thank you,

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  #6 (permalink)
Houston
 
 
Posts: 17 since Feb 2018
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davethetrade View Post
Hey, thanks for answering. I start to believe that the best way is to look at bid/ask spread. but, iīm confused. do you (or maybe someone else who see this) think itīs enough to just look at the difference between best bid and best ask that i marked with red circle.



What if it is a big spread between best bid and ask but then a lot of liquidity at 29.37.....29,38 etc on ask in this example (picture) or is that impossible if the spread between best bid and ask is big? i mean can we assume that the whole market will be low liquid just by looking at inside bid and ask spread (spread between best bid and best ask)?

I know itīs not a very big spread in picture, but itīs just example.

Thank you,

The way I see it, big/asks are a good way to gauge the market at first glance, I would never trade around how close/far apart it is though. Like you said, you could have the bid/ask be very wide but just a level below/above, you can have a guy Iceberging (showing just a little volume of the total he/she has) and then that crushes the bid/ask. I think you should definitely keep an eye on bid/asks throughout the day but not sure how much more you can do with bid/asks when it comes to analyzing liquidity.

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Gothenburg
 
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worldbfree View Post
The way I see it, big/asks are a good way to gauge the market at first glance, I would never trade around how close/far apart it is though. Like you said, you could have the bid/ask be very wide but just a level below/above, you can have a guy Iceberging (showing just a little volume of the total he/she has) and then that crushes the bid/ask. I think you should definitely keep an eye on bid/asks throughout the day but not sure how much more you can do with bid/asks when it comes to analyzing liquidity.

Okey, thank you. Itīs a complicated topic since there probably is a lot of ways looking at it. Maybe looking at Bid/ask spread to gauge liquidity is not as usefull as some say for this reason that someone can be hiding size a level above or below even if spread between best bid and ask is wide. Does somebody have other trick for how to look at liquidity to see if itīs high or low in a stock with no option market?

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