Topic

Only a few industry sectors (Consumer Defensive, Financial Services & Healthcare) have returned to liquidity levels available at the start of the period. Every other industry sector is still exhibiting significantly lower levels of liquidity.

May 20, 2020

Quantifying Available Liquidity in the Time of COVID-19

It is not news to say that the global health crisis has rocked financial markets. But when we go beyond the daily swings in price movements, what information can help traders better adapt to current market conditions? LiquidMetrix will offer a series of insights derived from our data and analytics.

Has liquidity returned to the markets? We have seen a rebound of prices, but price movement is not the same as liquidity. Understanding liquidity trends is fundamental for managing the risk associated with price volatility because it is the mechanism for price discovery. Without ample liquidity, the solidity and conviction underlying a stock’s price is ephemeral as it lacks the consensus sapientium of the markets.

The headline bullet points are:

  • Although the amount of available liquidity has to an extent recovered, levels are still significantly less than at the outset of the health crisis.
  • Only a few industry sectors (Consumer Defensive, Financial Services & Healthcare) have returned to liquidity levels available at the start of the period. Every other industry sector is still exhibiting significantly lower levels of liquidity.

We start by looking at what has happened to demand for liquidity since the onset of the high volatility resulting from the global health crisis. To do this, we use the LiquidMetrix Liquidity Index. The LiquidMetrix Liquidity Index measures the total value quoted on the order book across all trading venues at different price points. The trade value of every execution s is normalized into basis points to account for cross market comparisons. So, for example, the metric “Available Liquidity at 10 bps” calculates the total value available within 10 bps of the stock’s mid-price across all trading venues. For our purposes looking at changes in liquidity over the global health crisis, we have set the index start date to February 24th.

Figure 1 (below) looks at two key LiquidMetrix measures, the amount of value quoted within 5 and 10 basis points of the stocks mid-price. We focus on the 5 and 10 basis point metrics as being representative of the price levels closest to the mid-price and thus the most representative of true interest in trading.

Figure 1

The top chart shows the decline across in available liquidity in absolute terms, while the bottom chart shows the percentage decrease in quote value over the time period. The low point was on March 19th and since then available liquidity has been climbing back. Liquidity available for 10 bps is still, however, 43% below the level of February 24th and available liquidity within 5 bps is down 49% from the base date.

Read the full analysis here.

To get a picture of the relationship of liquidity to price risk from volatility we can compare LiquidMetrix Liquidity Index against the VIX Volatility Index. The VIX index, sometimes known as the “Fear Index” or “Fear Gauge” is a measure of forward-looking market volatility derived from price inputs for S&P 500 index options. We would expect to see an inverse relationship between the VIX and the LiquidMetrix Liquidity Index. An anticipated increase in price volatility, should be coupled with a decline in the amount of quoted trade value as investors would not have confidence that a quoted price represents the “true” price of the stock.


By Henry Yegerman, ISS LiquidMetrix

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