Crisis liquidity

An analysis on how the COVID-19 crisis has impacted liquidity and trading costs across the most liquid futures markets

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The unprecedented surge in volatility across asset classes witnessed during the first quarter in 2020 has been accompanied by an unparalleled change in market liquidity across a variety of financial markets, including cash equity markets and global futures markets. In this note, we quantify and visualize the liquidity dynamics at aggregate asset class and individual market level via different metrics for the period from January to May 2020. Based on a universe of 45 of the most liquid futures contracts traded in the US and Europe, we highlight how the COVID-19 crisis has reshaped the liquidity landscape across equities, bonds, FX and commodities markets. Additionally, we group futures into eight buckets based on their asset class and regional belonging, and we quantify the deterioration in liquidity conditions from the end of February onwards for each of these futures’ buckets. We also shed some light on the dispersion of each metric within each bucket. Where a corresponding liquid underlying cash market exists, we also provide a comparative analysis of such metrics between the futures and the cash market. Finally, we highlight that a deterioration in liquidity does not necessarily lead to increased trading costs in a strategy implementation context. Analyzing real trading and execution data from our Quantica Managed Futures Program (QMF Program), we show that, while average price market impact across the universe of futures increased during the crisis, the cost of trading one unit of risk actually diminished during the same time period.

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Quantica Capital
June 29, 2020