标题: What the heck is "liquidity," exactly... [打印本页] 作者: jcfa2011 时间: 2013-4-22 11:30 标题: What the heck is "liquidity," exactly...
Yes, I know more-or-less what liquidity means. But the problem is that it’s only “more-or-less.” I hear people talking about “adding liquidity” or “providing liquidity” or “liquidity driven” things like it’s the most obvious thing in the world.
In my mind, I think of liquidity as “the ability to convert an asset to cash quickly at close to the last quoted price.”
A corollary from the purchase side is “the ability to purchase an asset quickly at close to the last quoted price.”
There are several dimensions:
A: The quantity of an asset that gets converted. Converting larger quantities of an asset tends to have a larger impact on price at all levels of liquidity.
B: The speed at which the asset can be converted. The ability to distribute transactions over time reduces the price impact, but it also opens up risk to price changes from other factors in the interim.
C: The discount to the last price. The greater the price impact, the lesser the liquidity.
One version of this view (consistent with practitioners) is that the bid-ask spread is an indicator of liquidity, because if you buy something and immediately want to sell it, the BA spread tells you how much of a hit you must take on the price to turn around instantaneously.
But there are plenty of other times when people talk about providing liquidity that doesn’t really seem to fit into this view, and I wonder what I’m missing. HFT firms, for example, talk about “providing liquidity,” but in fact, that liquidity can disappear instantaneously, so are they really providing it? How are they making money, other than, perhaps, from each other.作者: manasib 时间: 2013-4-22 11:30
way too academic. no need.
liquidity is pretty much what you describe. Its just having cash (i.e. funding for banks from posting collateral) when you need it. the problems you’re seeing is that they need huge sums of cash that the market isn’t willing to provide.作者: noel 时间: 2013-4-22 11:31
FrankArabia Wrote:
——————————————————-
way too academic. no need.
liquidity is pretty much what you describe. Its
just having cash (i.e. funding for banks from
posting collateral) when you need it. the problems
you’re seeing is that they need huge sums of cash
that the market isn’t willing to provide.
he’s talking about market liquidity, not corporate liquidity (i.e. financial ratios for looking at ability to service debt; e.g. current ratio and operating cash flow ratio)作者: spartanag07 时间: 2013-4-22 11:31
You’re talking about two different things. Your view of liquidity is something I think we can all agree on. “Providing liquidity” is something else altogether. That’s a phrase HFT have branded onto to their forehead in an effort not to be shut down.
From what I can tell, “providing liquidity” is really just quote stuffing, and doesn’t help anyone. To be fair, it doesn’t really hurt anyone either, until a flash crash occurs. Then it’s horrible.作者: robjames1984 时间: 2013-4-22 11:32
One definition of providing liquidity is posting a limit order and waiting till you get hit/lifted. If you’re doing this on both sides (bid and ask), you’ll collect the spread if you execute on both sides. This is market making.
One definition of taking liquidity is executing via a market order and hitting a bit/lifting an offer. If you’re doing this, you’re paying the spread. One would only do this if they’re trading for alpha.
That said, you also seem to be trying to quantify liquidity and even predict it. That’s difficult and highly dependent on microstructure. One would definitely want to look at spreads, the depth of the order book, the commission structure of the ECN, etc.作者: SWASH 时间: 2013-4-22 11:33
I think this is a really good question (and critically important topic for anyone at a hedge fund), and I’m not sure I can provide an answer but I’ll throw out this: the volume from high frequency traders is not adding true liquidity to the market. Volume goes up, but those guys can step away at any time, especially when things get really bad.作者: hassan 时间: 2013-4-22 11:33
bchadwick Wrote:
——————————————————-
But there are plenty of other times when people
talk about providing liquidity that doesn’t really
seem to fit into this view, and I wonder what I’m
missing. HFT firms, for example, talk about
“providing liquidity,” but in fact, that liquidity
can disappear instantaneously, so are they really
providing it? How are they making money, other
than, perhaps, from each other.
When the firms are trading, they’re providing liquidity. When they’re not trading, they’re not providing liquidity. Most of them are under no obligation to trade constantly, and if they do turn off their trading, you would see a measurable decrease in liquidity.
Providing liquidity is generally a profitable endeavor, though not without risk. For instance, you can’t take one side of a trade forever and just build inventory. So, you might say you’re willing to take on a position up to some limit, whether that limit is based on average daily volume or % of the float or some other metric.作者: ap0258 时间: 2013-4-22 11:34
The HFTs don’t provide anything and, in fact, take it since regular traders do not have the ability to micro trade and front-run those traders, taking profits from ordinary people.
Somehow the markets functioned well before HFT, I hope they outlaw it soon. The first step was the SEC requesting the algos.作者: kingstongal 时间: 2013-4-22 11:34
spierce Wrote:
——————————————————-
The first step was the
SEC requesting the algos.
Step 2: SEC hiring people that understand the algos.作者: ayaz_mahmud369 时间: 2013-4-22 11:35
spierce Wrote:
——————————————————-
The HFTs don’t provide anything and, in fact, take it since regular traders do not have the ability to micro trade and front-run those traders, taking profits from ordinary people.
Somehow the markets functioned well before HFT, I hope they outlaw it soon. The first step was the SEC requesting the algos.
Everyone does have the ability, perhaps not the means. Much like a seat used to cost a lot of money to lease - they are just a modern day version of the specialists and pit traders of old. This will always be a part of the market imo.作者: bkballa 时间: 2013-4-22 11:35
spierce Wrote:
——————————————————-
Somehow the markets functioned well before HFT
This is abject nonsense. The markets have never been perfect nor even well-behaved.
All of the recent innovation has been, for the most part, an improvement for the retail investor. Penny quotes, electronic brokerages, ETFs, etc…
Perhaps you’re yearning for the day when there was a $100 commission to trade IBM with a 25c spread?作者: hassan 时间: 2013-4-22 11:36
so with that said, there is no confusion anymore right?….作者: RealEstate_CFA 时间: 2013-4-22 11:36
FrankArabia Wrote:
——————————————————-
so with that said, there is no confusion anymore right?….
…I’ve also heard it classified as rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars.作者: Rasec 时间: 2013-4-22 11:37
LPoulin133 Wrote:
——————————————————-
FrankArabia Wrote:
————————————————–
—–
so with that said, there is no confusion anymore
right?….
…I’ve also heard it classified as rich enough to
have your own jet. Rich enough not to waste time.
Fifty, a hundred million dollars.
A player.作者: bbtomato 时间: 2013-4-22 11:37
I would add that liquidity can be regime-dependent. For instance, if the market is declining sharply, then people may be unsure of what your asset is worth and in order to offload it you would need to accept an even larger decline.作者: malbec 时间: 2013-4-22 11:38
justin88 Wrote:
——————————————————-
spierce Wrote:
————————————————–
—–
Somehow the markets functioned well before HFT
This is abject nonsense. The markets have never
been perfect nor even well-behaved.
All of the recent innovation has been, for the
most part, an improvement for the retail investor.
Penny quotes, electronic brokerages, ETFs,
etc…
Perhaps you’re yearning for the day when there was
a $100 commission to trade IBM with a 25c spread?
you know what is abject nonsense? The idea that some bank or fund can utterly front-run all clients and every other market participant because they have a super computer connected to an uber internet pipe and they can quote stuff the sh!t out of a stock to pop limits. or that this “liqudity” can dissapear in a milisecond and cause the entire market to crash within that period. Or that they can flash-crash single stocks at the push of a button.
Then you attempt to say that without HFT we’d go back to the $100 commission with spreads at 25c. sorry, but that’s just a ridiculous argument. If the algos were removed we wouldn’t all of the sudden revert. HFT has done nothing at all to help out retail investors and has merely cost them millions if not tens of billions.
It’s pure market manipulation and should be illegal.作者: anshultongia 时间: 2013-4-22 11:38
I never said that “without HFT we’d go back to the $100 with spreads at 25c”. I was merely pointing out that the bygone days you yearn for were far worse than what we have now, particularly for retail investors. A lot of the innovation we’ve had has been beneficial for retail investors, including IMO, HFT.
HFT wouldn’t exist unless there was already a market inefficiency. HFT in essence is providing small amounts of liquidity for certain names, on certain venues, at certain times. Retail investors, while not getting perfect execution, are getting better execution, partially due to HFT, than ten years ago. (Very few even paid attention to execution at all ten years ago.)
Perhaps your lolrage is better directed toward the fragmentation of the markets than HFT? The reason SS flash crashes happen is because liquidity is fragmented across dozens of trading venues, many of which are trading the exact same/fungible things, but the price on one of those venues temporarily plummets/rips because someone routed an outsized amount of flow to that venue relative to its liquidity.作者: CPATrader 时间: 2013-4-22 11:39
spierce Wrote:
——————————————————-
you know what is abject nonsense? The idea that
some bank or fund can utterly front-run all
clients and every other market participant because
they have a super computer connected to an uber
internet pipe and they can quote stuff the sh!t
out of a stock to pop limits.
Front-running isn’t the same thing as HFT. You can criticize front-running without criticizing HFT.
or that this
“liqudity” can dissapear in a milisecond and cause
the entire market to crash within that period. Or
that they can flash-crash single stocks at the
push of a button.
If liquidity disappears and no one trades, then the market won’t fall. It takes people wanting to sell more than buy when liquidity dries up (no one seems to are about liquidity drying up and the market rising 100%, only falling 100%). I’m sorry, but I don’t have much sympathy for the panic-sellers. Anyway, if there are some prints -20% down, that doesn’t mean that volume-weighted prices for the day really changed much.
Then you attempt to say that without HFT we’d go
back to the $100 commission with spreads at 25c.
sorry, but that’s just a ridiculous argument.
I think the decline in commission has more to do with regulatory changes than the narrowing of spreads.
HFT has done nothing at all to
help out retail investors and has merely cost them
millions if not tens of billions.
HFT would have to steal more money than the narrowing of the spreads would have saved them.作者: rkapoor 时间: 2013-4-22 11:39
jmh530 Wrote:
——————————————————-
Front-running isn’t the same thing as HFT. You can
criticize front-running without criticizing HFT.
But you CAN criticize both. Sure, there can be front running without HFT, but HFT does enable faster front running.
If liquidity disappears and no one trades, then
the market won’t fall. It takes people wanting to
sell more than buy when liquidity dries up (no one
seems to are about liquidity drying up and the
market rising 100%, only falling 100%). I’m sorry,
but I don’t have much sympathy for the
panic-sellers. Anyway, if there are some prints
-20% down, that doesn’t mean that volume-weighted
prices for the day really changed much.
And what about stop-loss orders that are triggered. ZH has some good graphs of the volume pings that drop prices precipitously and the obvious market manipulation.
I think the decline in commission has more to do
with regulatory changes than the narrowing of
spreads.
HFT has done nothing at all to
help out retail investors and has merely cost
them
millions if not tens of billions.
HFT would have to steal more money than the
narrowing of the spreads would have saved them.
I agree 100%, the answer is obvious.作者: dkishore1 时间: 2013-4-22 11:40
spierce - I agree with you in principle.
Though, when talking about “frontrunning”, there should be a distinction between frontrunning, which is a broker specific problem, and simply trading. It does matter who’s doing it imo.作者: Finalnub 时间: 2013-4-22 11:40
And what about stop-loss orders that are triggered. ZH has some good graphs of the volume pings that drop prices precipitously and the obvious market manipulation.
I’m with KidDynamite, just eliminate market orders. Problem solved.作者: ap0258 时间: 2013-4-22 11:41
justin88 Wrote:
——————————————————-
I never said that “without HFT we’d go back to the
$100 with spreads at 25c”. I was merely pointing
out that the bygone days you yearn for were far
worse than what we have now, particularly for
retail investors. A lot of the innovation we’ve
had has been beneficial for retail investors,
including IMO, HFT.
Yeah, I yearn for the days, perhaps 10 years ago, when everything was massively inefficient. There isn’t a single shred of “innovation” that has been good for retail investors in HFT.
HFT wouldn’t exist unless there was already a
market inefficiency. HFT in essence is providing
small amounts of liquidity for certain names, on
certain venues, at certain times. Retail
investors, while not getting perfect execution,
are getting better execution, partially due to
HFT, than ten years ago. (Very few even paid
attention to execution at all ten years ago.)
What “market inefficiency” are you speaking of? Taking advantage of minute price differences, or blatantly manipulating prices? I guess with such efficient markets we’d never have had the credit bubble or the .bombs. Thank god for HFT.
Perhaps your lolrage is better directed toward the
fragmentation of the markets than HFT? The reason
SS flash crashes happen is because liquidity is
fragmented across dozens of trading venues, many
of which are trading the exact same/fungible
things, but the price on one of those venues
temporarily plummets/rips because someone routed
an outsized amount of flow to that venue relative
to its liquidity.
Yeah, perhaps if we tripled the current volume on the major exchanges we’d have an uber-efficient market. Ohh wait, we already did that and it didn’t do dick to make them more efficient.作者: AndyNZ 时间: 2013-4-22 11:42
spierce Wrote:
——————————————————-
[…]
I don’t know why I’m trying to explain things to you, since you seem to have an axe to grind. Hopefully others will benefit from a more rational discussion.
There are obviously still imperfections with the markets; in particular I’ve noted the fragmentation of equity liquidity is a problem. The markets will never be perfect; nonetheless the markets are fairer and more liquid than they were ten years ago, particularly for the retail investor.
For instance, as a retail investor in my Fidelity account, I can trade the S&P500 index in real-time, commission free via an ETF. Should I choose to invest in it, I pay a ~9bp expense ratio. Should I choose to trade it, the spread is usually $0.01. The top of book is usually liquid enough to support $1,000,000 trades at market. This is effectively infinite liquidity for a retail investor trading this asset.
HFT plays a major role, not only in liquidity, but also in the efficient aka fair pricing of all kinds of cross-market assets. This cross-market liquidity allows retail investors to trade markets at very fair prices when they were previously inaccessible. Two examples: GLD and LQD are ETFs that enable the retail investor to take previously-difficult-to-assume risks (gold and diversified IG corporate bonds), due to market structure and minimum price. (Front month gold on the CME is more than $100,000 per contract, and a diversified bond portfolio would require even more capital.)
One could argue the rapid pace of financial innovation is contributing to the bubble pricing of gold and bonds, but I digress.作者: towardsutopia21 时间: 2013-4-22 11:42
I don’t know why I’m trying to explain things to
you, since you seem to have an axe to grind.
Hopefully others will benefit from a more rational
discussion.
There are obviously still imperfections with the
markets; in particular I’ve noted the
fragmentation of equity liquidity is a problem.
The markets will never be perfect; nonetheless the
markets are fairer and more liquid than they were
ten years ago, particularly for the retail
investor.
For instance, as a retail investor in my Fidelity
account, I can trade the S&P500 index in
real-time, commission free via an ETF. Should I
choose to invest in it, I pay a ~9bp expense
ratio. Should I choose to trade it, the spread is
usually $0.01. The top of book is usually liquid
enough to support $1,000,000 trades at market.
This is effectively infinite liquidity for a
retail investor trading this asset.
HFT plays a major role, not only in liquidity, but
also in the efficient aka fair pricing of all
kinds of cross-market assets. This cross-market
liquidity allows retail investors to trade markets
at very fair prices when they were previously
inaccessible. Two examples: GLD and LQD are ETFs
that enable the retail investor to take
previously-difficult-to-assume risks (gold and
diversified IG corporate bonds), due to market
structure and minimum price. (Front month gold on
the CME is more than $100,000 per contract, and a
diversified bond portfolio would require even more
capital.)
One could argue the rapid pace of financial
innovation is contributing to the bubble pricing
of gold and bonds, but I digress.
Obviously somebody believes everything the Lords of Finance has said is good for society. Just as much as you wonder why you bother to edumacate my poor soul, I wonder if you even have one. Keep on believing in your (and their) greatness while the systemic risk inherent in such systems increases.
I am sure the SEC investigation will result in bupkis, that’s what happens in a “free market” (aka, purchased regulators) situation anyway.作者: atate2007 时间: 2013-4-22 11:43
I’ve pointed out repeatedly that market fragmentation, in the short run, is not a good thing for the retail investor. In the long run, it is beneficial, and we’ve seen dramatic technical advances in this space due to competition.
PS No, I don’t have a “soul”. I’m a complex bag of meat and water. Keep your sanctimonious, passive-aggressive bullshit to yourself, please. Thanks!
