Lack of Liquidity Fuels Volatility Spikes

Investors are blaming an unprecedented lack of liquidity for Wednesday’s gut-wrenching stock market open, which saw the S&P 500 fall as much as 2.2 percent from Tuesday’s close, sent the VIX screaming to 28 and led to outsized moves in major stocks like Disney.

According to Eric Hunsader of Nanex, there were 179 “mini flash crashes” during the first 15 minutes of trading, which is the most since the Knight Capital Group fiasco in August 2012. Additionally, Hunsader reports that there were 68 trades in the S&P e-mini that moved that key futures contract 3 or more ticks. And Treasury futures, too, moved sharply as a result of low liquidity.

The definition that Nanex uses for a mini flash crash is that a stock sees 10 or more down ticks, for a price change exceeding 0.8 percent, within 1.5 seconds

“There was no liquidity at all, so it doesn’t take a whole lot of size to really move the price,” Hunsader told CNBC. But “some people come in, and they’re used to buying or selling X-amount, and they’re not paying attention. And X-amount now causes significant movements in price.”

When this lack of liquidity collided with a great number of traders willing to get out at any price, markets got ugly.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza