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Aug 19 2019

JPM Liquidity Rates & VIX Correlation

JPM says that liquidity disappears as VIX spikes. This seems to make intuitive sense. The fact that the VIX is higher means the market is pricing in larger moves which means dealers don’t want to get stuffed with large trades as the market rips through them. This chart doesn’t tell us what level this depth is measured to, but the chart makes obvious that lower liquidity comes with higher VIX. SpotGamma models show that with large moves down in SPX (and therefore VIX spikes) dealers start increasing their selling in futures and SPY.

https://i2.wp.com/heisenbergreport.com/wp-content/uploads/2019/01/MK1Jan.png?ssl=1

From Heisneberg: The relationship between volatility and liquidity “is very strong and nonlinear e.g., market depth declines exponentially with the VIX”, he wrote, in a note dedicated to the subject. “Given that an increase in volatility often results in systematic selling, this relationship is the key to understand market fragility and tail events”.

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Written by SpotGamma · Categorized: Market Analysis · Tagged: futures liquidity, gamma, JPM, VIX

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