Monday, 14 April 2025

This Is The Worst Liquidity in History

Don Kaufman here.

If you thought the markets were chaotic before, buckle up—because what we're seeing right now is a full-blown liquidity crisis.

And no, I'm not being hyperbolic when I say this: this is the worst liquidity I've ever seen in my career.

I've been trading the S&P futures for decades, and let me tell you, it's never been this bad.

We're not talking about "a little light on volume." We're talking about a market so thin, even the smallest trades are causing massive ripple effects.

So, what's happening, why should you care, and how can you trade it? Let's dive in.

What Does "Terrible Liquidity" Look Like?

To put it bluntly: there's no one home.

When I look at the S&P futures—the product that drives order flow for the entire market—what I see is terrifying.

Bid size? 9 contracts.

Offer size? 10 contracts.

That's the top of the book, people.

Let me translate that for you: there's no depth in this market.

Market-making firms, the ones who are supposed to step up and create liquidity, are pulling back because they don't want to get systematically dismantled by sudden moves.

And who can blame them?

With volatility spiking and every headline sending shockwaves, they're terrified to tighten their markets.

What happens when liquidity is this thin? Every move gets exaggerated.

A small order can trigger outsized price movement because there's nothing—nothing—to absorb the impact.

It's like tossing a pebble into a puddle and watching it create a tidal wave.

Why Is Liquidity So Bad?

Here's the deal: market-making firms are in the business of managing risk, not taking it.

When volatility spikes (like it has recently), the risk of holding large positions outweighs the rewards of tighter bid-ask spreads.

Think of it this way: if you're a market maker and the spread is 1 point but the market moves 10 points in a second, you're screwed.

So, what do they do?

They pull back, widen the spreads, and leave the rest of us to deal with the chaos.

Add to that the lack of active participation from institutional players, and you've got a perfect storm. It's not just the retail crowd flying blind here—everyone is.

How to Survive (and Trade) in a Low-Liquidity Market

So, what do you do when liquidity dries up like this? You adapt. Here are a few actionable takeaways to navigate this mess:

1. Focus on the S&P Futures or SPY

Forget individual stocks for now. When the market moves as one giant correlated beast, it's the S&P futures (or SPY ETF) that are driving the action.

Why?

Because the S&P futures dictate order flow across the board. Apple, Tesla, Google—yes, they're moving, but they're following the lead of the futures. If you're not watching the S&P, you're flying blind.

2. Use Smaller Position Sizes

In a market with no liquidity, everything moves faster and harder. This isn't the time to swing for the fences.

Scale down your position sizes and give yourself room to breathe.

Imagine getting stopped out because of a random 20-point spike that has nothing to do with fundamentals.

It's happening to people every day in this market. Don't be one of them.

3. Don't Chase Moves

I can't stress this enough: don't chase. When liquidity is this bad, every move looks bigger than it really is. Markets are overshooting on both the upside and downside, and you'll get whipsawed if you're not careful.

Instead, wait for the market to come to you. Use limit orders and stick to your plan.

If you're trading options, focus on selling premium in wide ranges—don't overpay for inflated volatility.

4. Watch Volatility Like a Hawk

When liquidity is thin, volatility becomes your best friend and your worst enemy.

Keep an eye on the VIX, but also dig deeper—look at VVIX (volatility of the VIX) and the term structure of volatility.

An inverted volatility curve (like we're seeing now) is a flashing red warning sign.

It tells you that the market is still in chaos, no matter how much it rallies. Until that curve normalizes, don't trust the calm.

The Bigger Picture: Why This Matters

Here's the scary part: this isn't just a one-off issue. Poor liquidity isn't just a "today" problem—it's a structural weakness in the market.

When liquidity dries up like this, it increases the risk of a market-wide meltdown.

We've seen this before. Remember the flash crash in 2010? Or the COVID sell-off in 2020?

Both were exacerbated by a lack of liquidity. When there's no depth in the market, even a small catalyst can trigger a cascade of selling.

And guess what? That's exactly the environment we're in right now.

Stay Calm, Stay Smart

The worst liquidity in history isn't hyperbole—it's reality. But it doesn't have to be a death sentence for your portfolio.

By focusing on the right products (S&P futures), adjusting your position sizes, and keeping a close eye on volatility, you can navigate this market without getting caught in the chaos.

Remember: when the market speeds up, you slow down.

Take a breath, stick to your plan, and don't let the noise shake you. This isn't the time to panic—it's the time to trade smart.

Welcome to Whiplash Week.

To your success,

Don Kaufman

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