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Market Liquidity + Volatility 101
Markets depend on buyers + sellers being able to transact w one another efficiently + at a manageable transaction cost.
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$SPY $SPX #ES_F $QQQ $VIX
Markets depend on buyers + sellers being able to transact w one another efficiently + at a manageable transaction cost.
Read on
$SPY $SPX #ES_F $QQQ $VIX
1/ Liquidity is measured by the speed with which orders are filled.
Markets that have trouble filling orders in a timely manner, or cost substantial amounts, are considered illiquid.
An illiquid market would be housing
:
- high fees
- slow process
Markets that have trouble filling orders in a timely manner, or cost substantial amounts, are considered illiquid.
An illiquid market would be housing
:- high fees
- slow process
2/ A highly liquid market would be #ES_F futures market or US capital markets generally.
For ex: With #ES_F, I can place a market order to buy 1 contract + it fills immediately, almost 24h/day + at low fees.
The liquidity is higher during the day than at night
.
For ex: With #ES_F, I can place a market order to buy 1 contract + it fills immediately, almost 24h/day + at low fees.
The liquidity is higher during the day than at night
.
3/ For #ES_F , there is higher liquidity during regular trading hours because more traders are active.
âBig moneyâ traders include funds, professional traders, insurers, individual traders, money managers, etc.
âBig moneyâ traders include funds, professional traders, insurers, individual traders, money managers, etc.
4/ Imagine an illiquid market like housing. The seller offers the house on the market $750k, but a buyer bids $725k.
A bid-ask spread is the difference, or margin, between the buyer and seller.
The bid-ask margin, or spread, in liquid markets is much narrower.
A bid-ask spread is the difference, or margin, between the buyer and seller.
The bid-ask margin, or spread, in liquid markets is much narrower.
5/ Imagine you get your hands on a @justinbieber
autograph, which you think you can sell for $50k.
There won't be a huge market for that; it's an illiquid market.
But if you drop price to $200, you can attract more buyers, bringing liquidity into the market.
autograph, which you think you can sell for $50k.
There won't be a huge market for that; it's an illiquid market.
But if you drop price to $200, you can attract more buyers, bringing liquidity into the market.
6/ Liquidity + volatility are linked, with illiquid markets being more volatile.
If liquidity goes down as volatility rises, itâs can have a âloopâ effect where bigger traders want to avoid the risks associated w higher volatility, driving liquidity down further.
If liquidity goes down as volatility rises, itâs can have a âloopâ effect where bigger traders want to avoid the risks associated w higher volatility, driving liquidity down further.
7/ Some traders monitor the $VIX:
It's the index that estimates the marketâs future volatility using the implied volatility of options that expire ~30 days of equities trading on the S&P 500.
The VIX is also called the âfear indexâ or gauge.
It's the index that estimates the marketâs future volatility using the implied volatility of options that expire ~30 days of equities trading on the S&P 500.
The VIX is also called the âfear indexâ or gauge.
8/ These are underlying market concepts that in part drive balance + trend. It can happen during the day, from day to day, week to week, month to month.
Markets with low liquidity/high volatility are said to be thin.
Markets with low liquidity/high volatility are said to be thin.
9/ Markets can throw curveballs, too.
Earlier this year, #ES_F volatility fell when the orderflow/market depth had not yet.
For this reason, I keep an eye on the $VIX but itâs just a single datapoint among others.
Earlier this year, #ES_F volatility fell when the orderflow/market depth had not yet.
For this reason, I keep an eye on the $VIX but itâs just a single datapoint among others.
10/ Finally, for a point-counterpoint:
Some argue that the predictive power of the $VIX is limited, making the index more useful for confirmation of things we already know from, say, $SPY returns.
This concludes my tweet thread. #TheMoreYouKnow
Some argue that the predictive power of the $VIX is limited, making the index more useful for confirmation of things we already know from, say, $SPY returns.
This concludes my tweet thread. #TheMoreYouKnow
