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
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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.
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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Volatility is driven by macro factors, depth is driven by short term adverse selection. The former causes the latter.
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There is a way to make this chart even more stupid, expand it for 20 years, but keep the charts the same, ignoring the fact that 25 cents spread when S&P500 is 4500 is not the same as when it is 1000. Then you'd get to "Goldman Research" levels
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Hold on a sec, this *was* Goldman Research. They regurgitate same stupid chart for years now
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