Volatility and liquidity

Bull and Bear runs are designed to shake the deepest convictions  of both camps. We came from a period of relative low volatility to an astounding high range a volatility (+40%) since the beginning of the sell off.

One of the reason of such persistent high level of volatility is liquidity. The following chart illustrates best the situation. This is a small one minute chart snapshot of the last NYSE trading hour (11/03/2020). Each little bar is 1 minute and below you have the corresponding bar of the E-MINI S&P 500 future contract. The overall daily volume is about 2.8M contracts. We can observe that with about 7500 contracts (see arrow), the index moved up about 17 point or 0.63%.  With 0.0027% of the daily volume, we have such a huge move. The second arrow show a similar situation.

The impact of such move with low volume tend to trigger other moves. In such situation, traders who are short will see their Stop Loss orders being triggered. We end up having huge moves within short periods of time  1%-3% (30-100 points).

Liquidity is, in my view, the most important factor behind the current and persistent high volatility we are experiencing.  I do not know what will resolve the situation but I do know that it impacts tremendously all market makers (options in particular).

The second charts shows in green , the volatility of the EEM ETF (Emerging Market ETF in red faded line). This a very important exemple because you can observe that a falling volatility has gone hand in hand with a lower market price.

Market participants tend to believe that falling volatility is somehow a guarantee of higher market price. It is true that we have such inverse relationship between price and volatility a lot of time but it is not a rule.

The market needs to resolve its liquidity issues first.