Liquidity Insights: Q4 Equity Volatility

Volatility in equities returned in 2018, surprising markets with a spike in February after a remarkably calm 2017. Volatility, however, retreated through the summer before reappearing in the fourth quarter, resulting in some big price moves in major equity indices. The spike began on October 10, with the S&P500® dropping 3.3% for the day, closing the week down more than 4%. October 24 and December 4 saw similar downward spirals, with daily losses of 3.1% and 3.2%, respectively. These three dates represent the largest single-day losses for the quarter and were near the 4% daily drop seen on February 5.

The causes of these events are multifaceted, and CME Group Economic Research has more detailed insights into the various sources of volatility in 20181. Regardless of the cause, market participants continue to rely on futures and options to hedge risks in the asset class. For equities risk, the CME E-Mini S&P 500 is popular among participants to manage their exposure. Volatility can dampen some measures of book depth, initially leading to concerns about liquidity. While liquidity typically remains sufficient to execute trades and apply risk-hedging positions as necessary, there are also signs that the volatility in the fourth quarter resulted in a smaller impact on traditional measures of liquidity than was seen in February. This suggests that the lengthy period of calm before the February volatility spike may have exacerbated the market’s reaction to the shock.

Figure 1 – S&P500® Daily Price Change

Price Movements and Gaps

The daily decreases in the S&P500® from Q4 are mirrored in E-Mini S&P 500 futures and are visible in the hourly maximum and minimum prices for the future. Figure 2 shows the maximum and minimum prices for the E-Mini S&P for each hour, measured as a percentage change from the start of the Globex session. The ultimate daily decline can be seen building for both February 5 and October 10, the first days in the first and fourth quarters when volatility returned to equities after an extended period of calm. 

Before February 5, markets saw very low volatility for a long period, lasting all of 2017. The lower volatility period before October 10 lasted only a few months, and traders clearly remembered the volatility shock from earlier in 2018. The hourly price changes behaved very differently in response to volatility in October than in February. Both show minimum and maximum prices (Figure 2) on futures decreasing from the start of the Globex session, but the February prices reacted more dramatically than did October prices, falling farther and creating larger gaps between the maximum and minimum. While there may be many factors influencing different liquidity measures, these differences may have been due in part to the uniquely long period of low volatility ahead of the February spike. The relatively recent volatility spike may have made markets more resilient to the shock in October.

Figure 2 – % Change in Hourly Maximum and Minimum Prices from the Start of the Globex Session

Note: Price Range is calculated as:

Implementation Costs

In general, implementation costs for the E-Mini S&P 500 remained quite low throughout the periods of volatility, near the minimum 1 tick level. But we do see a difference in the February 5 implementation cost statistics, particularly as the end of day volatility set in around 14:00 CT. Prior to that time, there was very little difference between the dates, but markets clearly reacted more strongly to the February volatility than the October volatility, perhaps because of the year-long period of low volatility that preceded February.

Figure 3 – Hourly Implementation Cost on 10 Lot

Note: Minimum increment for the E-Mini S&P 500 is 1 tick

Looking at implementation costs across the year, this difference is even more clear. The cost-to-trade view in the CME Liquidity Tool shows the implementation cost for various lot sizes. Figure 4 shows the 10 lot, where the implementation costs peak in early February, reaching more than 1.14 ticks, up from a minimum of 1 tick. By contrast, the Q4 volatility barely reached 1.05 before the holidays.

Figure 4 – 2018 Implementation Cost on 10 Lot

Book Depth

Book depth, while an imperfect measure of liquidity as it does not capture the velocity of trading in a high volatility Globex trading session, can represent what the market is seeing during any given event.

The volatility event in February occurred at the very end of the day, as we can see on the hourly price changes in Figure 2. As a result, many of the market impacts weren’t seen until the following day, February 6, as we see in the implementation costs in Figure 4. The same is true for book depth. Looking at February 6 versus the Q4 volatile days, it is easier to see the different impact each event had on market depth. We also compared February 6 to the day after the volatile days,2 in case the impact was similarly delayed.

Throughout the day on February 6, the top three levels of book depth were lower than the levels seen during the volatile days in Q4. It should be noted that book depth regularly recedes at 15:00 CT in preparation for the end of the Globex session.

While the book depth quantity available during these days was sufficient for firms to trade and hedge their risk in response to increased volatility, the difference between February and Q4 may be, in part, due to the different volatility regime ahead of the individual volatile spike. February’s lower book depth may be due to the market not having seen volatility for such a longer period before the volatility returned.

Figure 5 – Top 3 Levels Book Depth Hourly Average


February’s volatility spike came on the heels of more than a year of extraordinary calm in equities markets, and participants may have been taken by surprise. The Q4 volatility was less of a shock to markets as there had been significant levels of volatility throughout 2018. Market participants appear to have responded better to the volatility in Q4, after they had ample time to adjust to the new volatility environment, and the impact to liquidity appears to be less significant. This suggests that the total effect of volatility is affected by recent events, and the lengthy calm prior to February 2018 exacerbated the impact of the volatility shock.

Bottom Line

  • Volatility can impact some measures of liquidity, even as we see sufficient trading capabilities in the market.
  • The ultimate impact of volatility may be influenced by the market conditions prior to the volatility event, especially during a transition of volatility regimes.
  • The perceived reduction in liquidity during the February volatility spike may have been caused or intensified by the historically low volatility in the year prior.


2 Note: equity markets were closed on December 5, the day after the volatility on December 4, in observation of the national day of mourning in honor of former President George H.W. Bush.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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