Liquidity, Volume & Liquidity

[alanezekiel]

Does anyone know the relationship between liquidity and volume. I know that volume relates to the absolute number of securities sold at any one time. Is it possible to have high volume and low liquidity and visa versa. What in real terms is liquidity. And what about volatility, is this the same as volume?

 

[Rhody Trader]

Liquidity is generally viewed as the ability to get a trade executed with a minimal of slippage from current market quotes. Volume definitely plays a major part in that. The greater the order flow, the higher the liquidity. That said, liquidity is also influenced by transaction size. If you want to trade 100 shares of just about any stock you'll find a liquid market. Raise that to 100,000 shares and things start to change.

 

[new_trader]

Does anyone know the relationship between liquidity and volume. I know that volume relates to the absolute number of securities sold at any one time. Is it possible to have high volume and low liquidity and visa versa. What in real terms is liquidity. And what about volatility, is this the same as volume?

Pretty much what Rhody said, but I would change your definition of volume.

Volume relates to the absolute number of securities traded within a specified time period. Remember, there are buyers and sellers so you can't simply say 'securities sold' because someone must be there to buy them!

High and low Volume is also a relative measure and must be treated in the context of the instrument you are trading, the time and other factors.

I would say that volatility relates more to price action rather than volume. We are talking effect as opposed to the cause. Prices moving up and down outside the normal range would be considered volatile. Again, it's mostly relative.

 

[switesh]

I would say that volatility relates more to price action rather than volume.

If you think about it, price action is really a result of volume being pushed around i.e. the dominant force between buyers and sellers at any give time frame dictate the price action. Therefore Volatility is really created by the underlying Volume and Liquidity.

Let me define Volume and Liquidity based on my own idea/experience, and not the dictionary meaning:

Volume: The Amount of Money (filled or unfilled) at various price points close to At The Money.

Liquidity: The rate (per second, or per minute depending on the market you're trading) at which orders get filled. The faster the orders get filled the better the liquidity.

Example:
Let's say Yahoo is currently trading at around $20
There are Buy limit orders @ 19.5 for $50,000, @ 19 for 85,000, @ 18.5 for 95,000
There are Sell limit orders @ 20 for $60,000, @ 20.5 for 75,000, @ 21 for 85,000

So there's great volume at various points At The Money, but after 10 minutes the scenario looks only $1,000 is filled at points between 19.5 and 20.5
This illustrates that despite good volume there's poor liquidity. i.e. there's big money waiting to be filled on either side of the current price but very little is actually filled during the elapsed time period.

On the other hand:
Let's say Yahoo is currently trading at around $20
There are Buy limit orders @ 19.5 for $5,000, @ 19 for 8,000, @ 18.5 for 9,000
There are Sell limit orders @ 20 for $6,000, @ 20.5 for 7,000, @ 21 for 8,000

In this case, the Volume isn't that great as the previous scenario, but in the next 10 minutes all the orders between 18.5 and 21.5 have been filled and the price stands again at $20.
This illustrates great Liquidity despite lower Volume, because money is being filled at a great speed. Traders can enter and exit positions in the market very quickly at or near current price.

I'm not trying to oppose your view new_trader but just providing my own view. Peace!

 

[switesh]

Volatility is simply Standard Deviation.
i.e. the movement in the instrument's price away from its Mean for any sample time frame.

Volatility is also a result of the underlying Volume and Liquidity.

The nature of Volatility varies depending on the factors that causes it, such as:

• Wide Spreads in thin Volume markets (or time frames within the same market)
• Too many Stop-loses placed within a close price range. The Flash crash for example.
• Technology malfunction on exchanges, or by HFT's
• Out-sized orders hitting the markets by big Hedge Funds and the like
• Panic or hysteria at peaks and troughs due to emotions
• Time frames and Seasonality - Volatility will vary between opening & closing bell, and mid-day. It also varies between holiday periods, Normal weekday, weekends. The average traded range and Volume will be different under these market conditions.
• Other Factors - depending on the markets you are trading various other factors will also affect Volatility such as news, expectations, interest rates, crop yields, adverse weather conditions.