Market Liquidity Risks
Thetrader has written extensively on the market liquidity subject over tha past months. Today Reuters has a story worth reading. Below from Reuters;
If the great commodity selloff of 2011 shows nothing else, it is that markets are undergoing serious structural changes that need to be followed closely. Our commodities analyst John Kemp has compared the oil plunge with the May 2010 flash crash in U.S. shares, and rightfully so. Four standard deviation moves in oil futures are not normal, even if Gaussian distributions underestimate the chance of such a move. The rise of high-speed electronic trading appears to be creating imbalances between buyers and sellers in nanoseconds that lead to outsized moves. It would probably be manageable if these problems were tied to smaller markets not so correlated with the rest of the world. But in this age of highly correlated global markets, these changes matter and need to be better understood — both by market participants and regulators.
One curious outcome about the rise of algo-driven trading is the volume is not leading to better liquidity, especially in these flash crashes. Liquidity — defined as the ease with which trades can take place without causing a major price impact (and not referring here to overall bank liquidity/funding risk) — appears to suddenly vanish in some of these big market moves, leading to massive swings.
More on the subject taht could cause the market big headache going forward.