https://www.wsj.com/articles/invest...rder-to-buy-or-sell-when-they-want-1524435467 Worsening liquidity comes as banks have reduced inventory of riskier assets and investors more closely track bond indexes In the options market, liquidity has deteriorated as new exchanges and more products have diluted trading. PHOTO: KIICHIRO SATO/ASSOCIATED PRESS By Gunjan Banerji and Sam Goldfarb April 22, 2018 6:17 p.m. ET 1 COMMENTS Investors are having a tougher time trading in a number of financial markets, a development that is weakening their ability to raise cash or to protect against big stock declines. The capacity to get in or out of an investment, known as liquidity, was rarely tested during the long stretch when stocks and bonds rallied with little volatility. Now as inflation concerns, trade anxiety and tension in Syria roil markets, investors notice it is getting harder to trade as easily. Chris Retzler, who manages the Needham Small Cap Growth Fund, tried to buy a small-cap tech stock in February, only to find that trading was thin and prices unattractive. Rather than paying up, he decided to wait for a couple of weeks until he found someone offering the stock at a reasonable price. “There is very little you can do at that point other than be patient and not overpay,” Mr. Retzler said. The liquidity problem has been worsening for years. Investors say it began nearly a decade ago, when post-financial-crisis regulation prevented banks from trading for themselves, and forced them to hold larger amounts of capital—thereby shrinking their inventory of riskier assets. This, in turn, reduced banks’ ability to serve as intermediaries between buyers and sellers. “It’s like going into a grocery store and there’s nothing on the shelves,” said Jeffrey Cleveland, who said liquidity is a hot topic among the traders he confers with regularly as chief economist at Los Angeles money manager Payden & Rygel. ‘There is good reason to worry about how well liquidity will be provided during episodes of market duress.’ —Goldman Sachs economist Charles Himmelberg In the U.S. stock market, half of the more than 8,500 listed companies trade less than 100,000 shares a day—a tiny sliver of what big stocks trade, according to an April 10 report from the Securities and Exchange Commission. The SEC is weighing changes to create more liquidity in small-caps, such as potentially concentrating trading in such stocks to a single exchange. “Thinly traded securities and their investors deserve a market structure that fits their particular needs,” Brett Redfearn, head of the SEC’s Division of Trading and Markets, said at a conference in New York last week. Even in the world’s deepest bond market, U.S. government debt, liquidity has worsened as trading activity can’t keep up with booming supply. The Federal Reserve’s network of primary dealers, which are required to bid at government bond auctions, reported $455 billion of daily Treasury debt trades for the seven days ended April 11. That figure has declined since 2007—even though since that time, tradable Treasury debt has more than tripled. DownsizingThe average size behind buy and sell quotesfor U.S. listed options has shrunk dramaticallythis year amid heightened market volatility.Source: ORATSNote: Data are for options with monthly expirationdates. .contracts2015’16’17’180100200300400 The recent spike in market volatility “suggests there is good reason to worry about how well liquidity will be provided during episodes of market duress,” Charles Himmelberg, a Goldman Sachs Group Inc. economist wrote in a recent report. “This could contribute to price declines and possibly prolonged periods of financial instability.” With less confidence that they can raise cash to make new purchases or meet client redemptions, some investors have sold more than they initially intended for fear that they might not be able to sell at a future time. “You might as well sell when the liquidity is there” because it might not be there another day, said Marc Bushallow, managing director of fixed income at Manning & Napier. This year’s volatility has even hampered liquidity in the popular E-mini S&P 500 futures on the Chicago Mercantile Exchange, a derivative product widely used for betting on the stock market’s direction or hedging against market swings. In the most active E-mini contract, the average number of contracts available to be bought or sold at the best price slumped from more than 500 in October to just 96 in March, according to MayStreet LLC, a data-analytics company. DownfallThe average number of contracts backing buyand sell options quotes for the SPDR S&P 500ETF has dwindled.Source: S3Note: Includes all expiration dates. .contractsJan. ’17JulyJan. ’1802004006008001,0001,200Dec. 2017x748 contracts In the options market, liquidity has deteriorated as new exchanges and more products have diluted trading, analysts say. Liquidity for options in February was worse than in August 2015, when China’s unexpected devaluation of the yuan sent markets reeling, according to Option Research and Technology Services. In March, Rohan Gupte, who trades at home, looked to add options on Amazon.com Inc. But when he noticed buy and sell prices further apart than usual, he decided not to pull the trigger. Wider spreads have become more commonplace among big tech stocks and indexes, causing him to back away from the market at times. “I just avoid doing that,” Mr. Gupte said. Even one of the most popular contracts has experienced much thinner trading. The number of contracts backing buy and sell options quotes on the SPDR S&P 500 Exchange-Traded Fund Trust, which tracks the S&P 500 index, dropped off dramatically in February and March, falling by more than 30% from last year’s average, data from S3 show. In the corporate bond market, investors say they sometimes have to break up orders into smaller pieces in order to complete larger purchases. But since a series of smaller trades takes more time, investors say the market can move against them while they are trying to buy. Ramping UpAverage daily listed options volumes havesurged in 2018.Source: Options Clearing Corp. .million contracts2000’05’10’150510152025 “We like certain bonds at a given price, but we’re not even done building our position and they’re five points higher,” said Matt Freund, co-chief investment officer at Calamos Investments. Some traders believe liquidity issues may not last. With the Trump administration rolling back bank regulation, they hope trading could improve if banks are allowed to hold more assets that the current rules define as risky. Traders say smaller bond transactions haven't been much affected. In corporate bonds, bid-ask spreads have been tighter than where they were before the financial crisis. During recent bursts of market volatility—from the 2013 spike in Treasury yields when the Fed started talking about tapering its bond purchases to the February surge in the Cboe Volatility Index—those spreads barely budged. Another reason for less liquidity: many investors are more closely tracking bond indexes, creating large demand for newly issued bonds but little appetite for older ones. The problem with investors managing against an index is that “everyone is chasing the same stuff,” Payden & Rygel’s Mr. Cleveland said.
%% Strange, but true. I don't read all the junk in WSJ , even when i subscibe to it. Mr random walker doWn Wall street [Mr Malkiel] wrote something against INDEX ETFs, first quarter, WSJ Great year 2017, for so many ETFs, i picked some more stocks then; anybody silly enough to name walls street ''random'' has to be right may be 5%. I MAY read his book; i still pick up throw away books sale in MAY books sale, sometimes.