FAST FIVE: How The Fed Created The Ultimate Paradox: Stocks At All-Time Highs With No Liquidity And Soaring Realized Vol
This is just one of the countless dislocations pointed out by traders, at least those older than 16 (who are currently generating 80%+ returns on Robinhood and outperforming hedge funds 20-to-1).
and linked to that, the ongoing obliteration of equity liquidity, which means that even odd-lot orders can now push the market at will.
This effect becomes obvious when looking at liquidity supply versus the inverse of realized market volatility.
Liquidity supply here is measured as the average bid and ask sizes from first limit quotes, similar to the Goldman chart above looking at e-mini top-of-book bid-ask depth (or lack thereof) and is broadly a proxy for the average liquidity available in the equity market at any one moment.
Liquidity is most likely to become, once again a topic of concern.” And when it does, sparking another market selloff, the Fed will inject even more liquidity, leading to even less market liquidity until eventually we reach the inevitable singularity where the Fed's latest “bailout” will mean there is no liquidity at all left in the what was once known as “the market.”.