Does market liquidity fall in bear markets?

[TheMotorcycleBoy]

For avoidance of doubt I mean this kind of liquidity:

An asset is more liquid if it can be sold at short notice without loss. That depends on finding a buyer, the time it takes to trade and the price effect of trading. When there is a dearth of buyers, an asset can be sold quickly only if the owner is willing to accept a knockdown price.

from https://www.ft.com/content/a3a03838-150 ... 716786f966
it was the second result when I googled for "does liquidity fall in a bear market"

What I'm curious about is what happens to trading volumes as stuff like this pans out. By "stuff" I'm talking about Black Swan events that shock the markets like this e.g. DotCom bubble, CreditCrunch and now the "COVID-19 and oil price war fight".

Presumably we have sporadic crazy buying and selling e.g. in the market opening when folks first read news, and panic sell. Then I guess the volumes are high - and sometimes trading gets temporarily suspended etc. e.g. by circuit breakers on the US markets so the radio tells me. But I'm curious, is there generally a time where actual retail trading slows right down? That is, the time when the fearful have sold up all and the slightly more stable folk have slowed down their spending sprees, and realised that "this things gonna take it's time to pan out" let's just drip money in a little slower now. Presumably the institution side of things e.g. asset managers, pension funds will continue to trade at their usual rates. However, as I mentioned, does retail trading volumes fall somewhat after the initial panickers are gone, and the gratuitous raiders are all spent up? And does this have an effect on overall liquidity?

I'm assuming that liquidity does fall and that bid/offer spreads will broaden. Eventually there will be minimal retail investment activity, i.e. these folks will either feel despondent or wounded by their losses and hence not participitate. I'm just curious as I've never been in this investment environment previously - however my intuition informs me that the words I've written above are correct.

Matt

[dspp]

For avoidance of doubt I mean this kind of liquidity:

An asset is more liquid if it can be sold at short notice without loss. That depends on finding a buyer, the time it takes to trade and the price effect of trading. When there is a dearth of buyers, an asset can be sold quickly only if the owner is willing to accept a knockdown price.

from https://www.ft.com/content/a3a03838-150 ... 716786f966
it was the second result when I googled for "does liquidity fall in a bear market"

What I'm curious about is what happens to trading volumes as stuff like this pans out. By "stuff" I'm talking about Black Swan events that shock the markets like this e.g. DotCom bubble, CreditCrunch and now the "COVID-19 and oil price war fight".

Presumably we have sporadic crazy buying and selling e.g. in the market opening when folks first read news, and panic sell. Then I guess the volumes are high - and sometimes trading gets temporarily suspended etc. e.g. by circuit breakers on the US markets so the radio tells me. But I'm curious, is there generally a time where actual retail trading slows right down? That is, the time when the fearful have sold up all and the slightly more stable folk have slowed down their spending sprees, and realised that "this things gonna take it's time to pan out" let's just drip money in a little slower now. Presumably the institution side of things e.g. asset managers, pension funds will continue to trade at their usual rates. However, as I mentioned, does retail trading volumes fall somewhat after the initial panickers are gone, and the gratuitous raiders are all spent up? And does this have an effect on overall liquidity?

I'm assuming that liquidity does fall and that bid/offer spreads will broaden. Eventually there will be minimal retail investment activity, i.e. these folks will either feel despondent or wounded by their losses and hence not participitate. I'm just curious as I've never been in this investment environment previously - however my intuition informs me that the words I've written above are correct.

Matt

Matt,

There are definitely times when liquidity can reduce. One of the reasons to permit/encourage shorting is that it means liquidity ought to be there even in a down-market. However not everyone is in favour of shorting and both the Spanish & Italians have temporarily prohibited shorting, and to an extent this has an extraterritorial effect (sovereignty addicts take note, and of course caveats apply):

https://www.londonstockexchange.com/exc ... 59749.html

The Chinese have done this as well, though through other mechanisms.

One can debate the pros & cons of shorting in general, and measures such as these in particular.

regards, dspp

[odysseus2000]

I think your asking about what are the roles and requirements of market makers:

https://www.londonstockexchange.com/tra ... making.htm

Regards,

[TheMotorcycleBoy]

I think your asking about what are the roles and requirements of market makers:

https://www.londonstockexchange.com/tra ... making.htm

Regards,

I don't think so.

Isn't an Market Maker strictly speaking a middle man? IOW if activity from retail drastically reduces (neither of you commented as yet to confirm or deny what I suggested in my OP), then MMs surely have less certainty that they can shift any excess stock, hence their risk increases. If I was in that position I'd increase my margins somehow - i.e. my b/o spread to mitigate my risk.

Matt

[SalvorHardin]

What I'm curious about is what happens to trading volumes as stuff like this pans out. By "stuff" I'm talking about Black Swan events that shock the markets like this e.g. DotCom bubble, CreditCrunch and now the "COVID-19 and oil price war fight".

Presumably we have sporadic crazy buying and selling e.g. in the market opening when folks first read news, and panic sell. Then I guess the volumes are high - and sometimes trading gets temporarily suspended etc. e.g. by circuit breakers on the US markets so the radio tells me. But I'm curious, is there generally a time where actual retail trading slows right down? That is, the time when the fearful have sold up all and the slightly more stable folk have slowed down their spending sprees, and realised that "this things gonna take it's time to pan out" let's just drip money in a little slower now. Presumably the institution side of things e.g. asset managers, pension funds will continue to trade at their usual rates. However, as I mentioned, does retail trading volumes fall somewhat after the initial panickers are gone, and the gratuitous raiders are all spent up? And does this have an effect on overall liquidity?

I'm assuming that liquidity does fall and that bid/offer spreads will broaden. Eventually there will be minimal retail investment activity, i.e. these folks will either feel despondent or wounded by their losses and hence not participitate. I'm just curious as I've never been in this investment environment previously - however my intuition informs me that the words I've written above are correct.

Yes. Liquidity tends to fall in times like these. When liquidity dries up prices can fall by large amounts on little or no trading. Market makers will widen their spreads to account for reduced liquidity, because they are now taking on much more risk by buying shares than the level of risk that they take on in normal times.

A good rule of thumb to bear in mind is that massive retail investor selling tends to signal that we're close to the bottom of the market. A good indicator of this is articles in the press about record levels of unit trust redemptions. That's why quite a lot of private investors tend to hold on through the falls (I'm one of those) - it's easy to get spooked out of the stockmarket by price falls.

Institutional selling generally falls when we're close to the bottom as most of those who were going to sell will have sold.

Times like these are a great reminder as to how dangerous it can be investing using borrowed money.

[TheMotorcycleBoy]

Many thanks this Salvor this is just the answer that I'd imagined.

What I'm curious about is what happens to trading volumes as stuff like this pans out. By "stuff" I'm talking about Black Swan events that shock the markets like this e.g. DotCom bubble, CreditCrunch and now the "COVID-19 and oil price war fight".

Presumably we have sporadic crazy buying and selling e.g. in the market opening when folks first read news, and panic sell. Then I guess the volumes are high - and sometimes trading gets temporarily suspended etc. e.g. by circuit breakers on the US markets so the radio tells me. But I'm curious, is there generally a time where actual retail trading slows right down? That is, the time when the fearful have sold up all and the slightly more stable folk have slowed down their spending sprees, and realised that "this things gonna take it's time to pan out" let's just drip money in a little slower now. Presumably the institution side of things e.g. asset managers, pension funds will continue to trade at their usual rates. However, as I mentioned, does retail trading volumes fall somewhat after the initial panickers are gone, and the gratuitous raiders are all spent up? And does this have an effect on overall liquidity?

I'm assuming that liquidity does fall and that bid/offer spreads will broaden. Eventually there will be minimal retail investment activity, i.e. these folks will either feel despondent or wounded by their losses and hence not participitate. I'm just curious as I've never been in this investment environment previously - however my intuition informs me that the words I've written above are correct.

Yes. Liquidity tends to fall in times like these. When liquidity dries up prices can fall by large amounts on little or no trading. Market makers will widen their spreads to account for reduced liquidity, because they are now taking on much more risk by buying shares than the level of risk that they take on in normal times.

A good rule of thumb to bear in mind is that massive retail investor selling tends to signal that we're close to the bottom of the market. A good indicator of this is articles in the press about record levels of unit trust redemptions.

Thanks for the tip. What can kind of sources share this info, if you don't mind me asking - do you have any links handy?

That's why quite a lot of private investors tend to hold on through the falls (I'm one of those) - it's easy to get spooked out of the stockmarket by price falls.

Yes I certainly am too. I've only sold all of our corp bonds and a block of Persimmon shares (they were XD), both sets of assets were either in credit or had delivered enough coupons to mitigate any price difference. I did that to raise extra cash. I also sold some Royal Dutch Shell, yes at a loss, but TBH I wanted out of oil (personal long term views), and this was a good opportunity to free up more cash.

In summary I was arguably over eager on the buying department a week or two back, but now I've still got some cash I'll look to drip into the most cash-rich and/or quality businesses on my list over the next weeks or months.

thanks Matt

[odysseus2000]

motorcycleboy
I don't think so.

Isn't an Market Maker strictly speaking a middle man? IOW if activity from retail drastically reduces (neither of you commented as yet to confirm or deny what I suggested in my OP), then MMs surely have less certainty that they can shift any excess stock, hence their risk increases. If I was in that position I'd increase my margins somehow - i.e. my b/o spread to mitigate my risk.

Matt

Yes, but it is the market maker who controls what is going on by exactly the mechanism you describe and this in turn feeds back into participant actions.

One can generalise and say that retail buys at the top and sells at the bottom, but there tends to be a series of declines or a series of rallies en-route to the pivot points, all of which involve retail participation.

It is never that all retail acts at specific points and is merely an observer at other times. No one knows either tops or bottoms until sometime after the event.

Regards,

[SalvorHardin]

SalvorHardin wrote

A good rule of thumb to bear in mind is that massive retail investor selling tends to signal that we're close to the bottom of the market. A good indicator of this is articles in the press about record levels of unit trust redemptions.

Thanks for the tip. What can kind of sources share this info, if you don't mind me asking - do you have any links handy?

I don't know of any sources where you can find information out about the levels of private investor selling. In the past it has been mentioned in the press and/or on TV.

On the other side, excessive private investor optimism is a great market top indicator (I didn't really see much of this in January). In August 1987 I was in a pub where loads of people who had never invested in shares were talking about stagging "The Royal Event", a big unit trust promotion. This is after people like me had been making a tidy living for several years on the privatisations which these people wouldn't have touched with a bargepole. Two months later we had the Black Monday crash.

In early March 2000 (shortly before the dotcom crash), I switched on the TV in the hotel where I was staying (before going to work) to see breakfast TV presenters talking about buying shares in the LastMinute.com IPO. A huge sell signal. When I went into the office and pointed out what I'd just seen, colleagues who were very big in dotcom shares said that this was a very bullish sign. As did some of the client's staff.

[Gan020]

Market liquidity dries up when both buyers and sellers disappear. Particuarly in times when their is a lack of confidence in the market as to where we are going next.

It can get circular in that even if buyers like the price, they do not buy as they are concerned if the trade goes wrong they can't easily close their trade by passing the shares onto another party.

As liquidity dries up the MM's appetite for risk dries up too as they have to find a counterparty, so they increase the spread. And once they increase the spread buyers and sellers appetite to trade dries up further.