SWASH

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.

robjames1984

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.

spartanag07

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.

noel

FrankArabia Wrote:
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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)

manasib

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.