Great article by @EricGPlatt and @JARennison examining how atrophying liquidity has exacerbated the violence of many recent moves. https://www.ft.com/content/e4e33332-544b-4633-8b3b-a9594837baf1 …pic.twitter.com/q4WaZZsweU
Couldn’t this be the other way round? In volatile markets liquidity providers are less willing to quote tight spreads, and offer less size when they do. Their P&L when adversely selected is proportional to vol and size so this makes sense.
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The reciprocal of the “depth” line is basically a chart of volatility.
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Of for sure, it's a bit of a chicken-egg situation. Clearly when vol spikes MMs widen spreads and cut order sizes. But then that makes the vol more pronounced, is the argument here.
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