Eric Hunsader, over at market data firm Nanex, explained to us that Monday was a historic day in the market regarding liquidity, quote traffic, and volatility.
He said that Monday’s trading day had the lowest liquidity (ability to convert assets into cash) and the highest quote traffic (buy or sell orders of a given stock and a given price) ever. That means even though buyers and sellers were blasting out price orders, they were getting filled at a low rate.
From what Nanex sees, that quote blasting was due to a volatility in price — which is weird, since there was little liquidity to move the price.
Nanex tracked this using something called the eMini Depth Book indicator, “an excellent early warning signal for extreme intraday volatility.”
The eMini is based on the number of orders resting in the nearest 10 levels of depth for the active Electronic S&P 500 Futures Contract.
The whole thing actually has 20 levels, 10 for buy orders and 10 for sell orders. Each level holds a certain number of buy/sell orders. The more orders in the market, the more tightly packed each level will be.
“It’s really showing you how many buy orders exist at each price level below the market, and how many sell orders exist above the market,” Hunsader told Business Insider. “When there are a lot of buy orders, a 1000 contract sell order will fill at the top 1 or 2 levels, When there are fewer orders in the book, that same 1000 contract sell order will clear out 5 to 10 levels. In other words, with more orders in the book, a 1000 contract buy/sell order will have less impact on the price.”
On Monday, the book sunk to its lowest levels since January 2010, but not necessarily because orders were getting filled.
Not coincidentally, we also saw a record high number of quotes on CQS – the consolidated quote feed for NYSE, NY-ARCA and NY-AMEX equities. This is because a few hundred emini contracts bought or sold immediately, will clear out many levels of the order book, causing an explosion of quotes and trades as the entire market adjusts to the new price level.
Note that the $VIX index also sunk to 52-week lows on the same date.
And all that together equals price volatility.
Of course, Nanex also has some gorgeous charts to illustrate this activity. Here’s one: