Here is an idea: What if there were companies and individuals in markets (bonds, equities, etc.) that stood ready to buy (sell) when everyone else was selling (buying). The appeal is obvious: Markets are generally hugely liquid, right up until you need them to be liquid. Liquidity is most scarce, as the trader saying goes, when you need it most.
Of course, we already have these people "“ they're called "liquidity providers". They take many forms, from floor traders to flash trading "?bots, but these are all sold as liquidity providers. Whether it's a few balding dudes on the NYSE floor, or a few thousand lines of "C" code on a co-located server, the line of patter for both is that having them is good for us. Why? Because they both stand read to buy and sell we need it, whether it's piecemeal, as is the case with the NYSE dudes, or blindly and continuously, as the the case with sleepless software.
It's a good story. The trouble is, like with so many appealing stories, it isn't true. As we have seen in recent months, these liquidity providers still exist in marketing name only. Just try to find any liquidity when you need it most, whether it's in the open market, or in dark pool. It doesn't exist, zip, zero, nil, nada.
Now, that's not really news. The idea of providing liquidity, especially during market crises, has always been like the "whore with the heart of gold", more mythologized than observed. After all, it might sound look a good idea to have someone making markets liquid, but most of the time markets already are liquid, and when they're not "¦ well, let's just say you won't find many sane market-makers poking their heads up and saying "Pick me!". It makes liquidity provision into something more like a regulated utility, at best, but it was easier to demand someone take the other side when market volumes were much smaller than they are today,
Consider this: In the (not so distant) past the provision of liquidity was piecemeal, as was the withdrawal. It took many traders, many different companies, and many different decisions, all with lags, uncertainty, and general unpredictability. That slack in the system made liquidity unpredictable in some ways, but it also arguably made markets less subject to runs, crashes, and similar Wile E. Coyote episodes.
Markets today don't work that way. There are quiet links and subterranean connections that didn't exist before: systems are observing systems, adapting in real-time to algorithms about which they know only what they observe by trading with and against them -- like battle-bots playing a tic-tac-toe variant with savage consequences. The result is that most of the time we have far more liquidity than would have been imaginable even a few years ago "“ you can do block trades on many equities with scarcely a ripple. But liquidity is also now picosecond switchable, something that can ramp endlessly, even on its own in a machine-to-machine feedback; but can also collapse in a click, like a switch being turned off. Pffft, and it's gone.
The liquidity landscape has been transformed. We have higher peaks and lower valleys, toggling between infinity and zero, both states which flipping in the Boolean if/then logic of a few lines of software running on a computer somewhere. The trouble is, we are still not being provided with liquidity, if by that we mean the ability to trade easily when we need it most. We are, however, being provided with illiquidity "“ regularly thin markets, provided as a service. We can, increasingly, count on nausea-inducing plunges in the markets on a more regular basis as liquidity click-flashes to zero, and equities tumble behind. Where we once felt victimized by fickle liquidity providers, welcome to the tyranny of the the illiquidity providers.
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