It was just over 9 years ago today when we wrote  “The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans” in which we explained how as a result of the growing influence of HFT, quants and central banks, the market itself was breaking. We also highlighted what the culmination of the market’s “breakage” could look like:

liquidity disruptions could and will lead to unexpected market aberrations, such as exorbitant bid/ask margins, inability to unwind large block positions, and last but not least, explosive volatility: in essence a recreation of the market conditions approximating the days of August 2007, and the days post the Lehman collapse…

We even laid out some possible catalysts for a possible market crash: “continued deleveraging in quant funds, significant pre-market volatility swings as quants rebalance their end of day positions, increasing program trading on decreasing relative overall trading volumes.”

We saw all of the above elements briefly come together when on February 5 the market finally did break in one spam of exploding volatility, as its topology was torn apart by various, disparate elements, resulting in virtually all of the above materializing, if only for a short time, and blowing up the VIX, which soared by the most on record, rising from the lower teens to above 50 in the span of hours, while bankrupting countless vol sellers.

Since then, the same elements that coalesced in 2017 to pressure and keep the VIX at its lowest level in history  reemerged, and the “selling of volatility” once again reappeared as a dominant trading strategy, but not before Goldman Sachs wrote a report in March in which it echoed everything that we warned about over 9 years ago, and which increasingly many have said in the past decade, namely that the advent of algo trading and HFTs have collapsed market liquidity to the point where the market itself has become precariously brittle, prompting increasingly frequent flash crashes, and leading Goldman to conclude that, when it comes to market risk factors, “liquidity is the new  leverage” in a world in which HFTs are the marginal price setters:

…click on the above link to read the rest of the article…