Goldman Says S&P 500 Futures Tumult Stoked by Declining Liquidity

(Bloomberg) -- Diminishing liquidity in the S&P 500 futures market has largely contributed to this week’s extreme price moves, which may have been disproportionately driven by individual trades, according to analysis by Goldman Sachs.

“Because liquidity and volatility are interconnected, creating a self-reinforcing loop, liquidity conditions have been an important contributor to the velocity of recent S&P 500 moves,” Goldman strategists Rocky Fishman and John Marshall wrote in a note on Thursday. S&P 500 E-mini futures twice this week plunged to levels that triggered a Chicago Mercantile Exchange circuit breaker preventing declines from surpassing 5% from a previous session’s reference price.

The extreme moves come as the Goldman strategists say top-of-book depth, a gauge of liquidity that measures where market makers set their bids and offers, “has started to lose meaning” for S&P 500 E-mini futures. As volatility spiked, electronic futures liquidity has fallen to where there has been a median of 10 contracts, representing $1.5 million, on the bid and ask of E-mini futures screens over the past week. That compares with a median of 120 contracts, or $18 million, in 2019, their analysis found.

To be sure, less liquidity and wider markets could also simply be a function of lack of appetite for risk in the current environment as the coronavirus pandemic worsens and oil prices collapse. With implied volatility and price swings not seen since the global financial crisis, no trader wants to be caught overexposed.

“The key takeaway of diminished liquidity, however measured, is that individual trades can move markets more than they otherwise would have, leading to higher volatility,” the Goldman analysts wrote.

They estimate that during the March 9 sell-off “E-mini futures had 50 cent wide markets more than 25% of the time, more than double the frequency seen on December 24, 2018.”

--With assistance from Cristin Flanagan.

To contact the reporter on this story: Gregory Calderone in New York at gcalderone7@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Richard Richtmyer, Jennifer Bissell-Linsk

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