The writer is senior portfolio manager at Capstone Investment Advisors
Broad market liquidity — the ease with which investors can buy or sell a security without affecting its price — has been in a downward spiral for more than 10 years.
Look, for example, at what has happened to trading in futures contracts on the S&P 500 index — typically the world’s most liquid equity index futures. Over the past decade their liquidity, as measured by market depth, has collapsed by around 90 per cent. This pattern is repeated across asset classes and regions.
Depth is broadly a measure of the market’s ability to absorb flows without meaningful price impact in the underlying security. More specifically, it denotes the number of shares or contracts available on the bid or offer on a security at any point in time.
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