2020 is now 2/3 over (everyone take a deep breath). This is perhaps a good time to take another look at the evolving liquidity characteristics of various markets. In previous posts, we have seen that large spike in volatility brought on by the COVID induced economic downturn was correlated with a sharp decline in the amount of liquidity available in the markets. Sharp reductions in available liquidity are concerning because it makes price discovery more difficulty, increases price risk and by extension raised trading costs.
This week’s highlights:
- In both absolute and percentage change terms, the US and UK markets have had the largest increases in liquidity after the Covid-19 volatility spikes of March and April.
- By all measures of liquidity, the IBEX is the weakest index among those reviewed.
We use five indices as proxies for their markets. They are the Russell 2000, the FTSE 100, The Swiss SMI, The Nordic 40 and the IBEX 35. To examine changes in available liquidity, we use three metrics. The first “Available Liquidity at 10 bps” measures the total value quoted within 10 bps of the stock’s mid-price for every trade across all trading venues. The trade value of every execution is normalized into basis points to account for cross market comparisons. The second metric is a variation of the first, we calculate the increase in available liquidity as you move down the Order Book from being within 10 bps of the mis-point to 25 bps away from the mid. Finally, we look at Trade Imbalances. This metric measures the amount of traded value bought divided by the total amount of traded value bought and sold. Of course, every order has both a buyer and a seller, we designate a trade to be a “Buy” when it is executed at the Bid and designate the trade to be a “Sell” when executed at the Offer. We use this metric to identify whether there is more pressure on buying or selling during the time period. A positive number represents Buy pressure (more value traded at the Bid rather than the Ask) and a negative value represents Sell pressure (more value executed at the Offer).
Read more here.
By Henry Yegerman, ISS LiquidMetrix