by Gavin M.
If you don't know what liquidity is, well, let me briefly explain. Liquidity is a measure of trading volume. If a security is traded frequently within a short period of time, it is considered to be very liquid as there is a lot of people trading it. Apart from 50 big stocks out there, liquidity is quite sparse. That can be a good or bad thing. Lack of liquidity is loved by everyone who wants to drive prices higher or lower quickly.
I only need to look at stocks like GOOGL and PCLN to see that past noon time there is barely any liquidity. It is a trader's nightmare because how can you get out of your trade if no one is going to meet you at the bid or ask? Worse, you'll be forced to get out of position at a much worse price because there is barely anyone trading it. Only HFTs can enjoy the lack in liquidity because they can just scalp quickly.
I expect liquidity in the stock markets to get worse as the summer gets under way. This is normal as most people go on vacation. If you know how December trades, then you'll know how this summer will get. Those of you who do trade multiple products can benefit in the diversity. I am sure if you read through various reputable sites on market volume you will notice that there has been a continuous drop in stock market volume over the last 5 years. You can chalk it up to retail investors leaving. You can also think of it as traders diverting into options or derivatives as opposed to actual shares.
I do not think the retail trader is dying. I think the retail trader is just expanding his/her choices as to what to trade. With forex, futures and other OTC products becoming more accessible and mainstream, diversity is no longer a perk but a necessity.
May the Tsipras be with you!
Traders from Equity Sense will be writing on this blog on positions and other market-related things.