I'm beginning to see charts & other signals pointing to slowly dwindling market liquidity. I haven't fully made sense of it yet, but the trend is worth watching closely. Posting the charts/signals I find on a rolling basis below:
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$IWM spreads have been widening throughout 2021 even as the VIX drops below 20 - could be impact of passive focusing on large cap names over small cap?pic.twitter.com/iBDGQkOhri
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The number of 5-sigma moves in S&P 500 daily returns vs. their trailing 30 day avg has been rising even since 2019. I'm sure this chart looks even crazier updated through 2021:pic.twitter.com/6WE3qEROBH
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Spreads of even the top 5 largest, most liquid names have seen spreads trend upward since March 2020, with material spikes during selloffs:pic.twitter.com/0wzQyjjYBU
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Liquidity provider equity returns have materially outperformed the broader averages since the beginning of 2020. If liquidity is becoming harder to find, it follows that the firms supplying this liquidity can charge more for their services & outperform.pic.twitter.com/eOoIfTXNds
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Aggregate options bid/ask spreads are widening in 2021 even as retail slows down & posted notional size grows:pic.twitter.com/rsMgUbE0IG
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End of conversation
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