1/x) Circling back to some of my points in this thread. I've already extensively discussed diminishing liquidity since Volmageddon & March 2020, yet the recovery appears to be breaking down. Equity market depth has begun deteriorating again & bid-ask spreads are getting stretched

https://twitter.com/FadingRallies/status/1379517673185361925

2/x) The implications of this are pretty obvious, but it's not that straightforward. Bc of latent orderbooks etc, it's not that bad moving isolated size during calm waters. But liquidity is inherently short volatility & embeds convexity within the orderbook on heavy onesided flow

1/x) As $SPX powers through 4K to new ATHs and $VIX cracks below 20, all is well and nature is healing. Yet the irrational ebullience masks over the unresolved and proliferating fragilities lurking underneath the surface that pose a systemic threat to the market structure. 2/x) I've already discussed deteriorating equity market liquidity extensively, but in our overleveraged market the significance and implications of this sinister vulnerability can't be understated. Liquidity –– most importantly market depth, has been vanishing since Volmageddon.

1/x) The notion that the next "true" risk-off event can't parallel March 2020 is ignorant. On the contrary, a far more viciously reflexive & piercing situation can manifest, with volatility exploding through March highs. Likewise, "The $VIX bubble" Kolanovic note is just silly. 2/x) To counter Kolanovic, I've already argued extensively how elevated vols are more due to a lack of vol supply over hedging demand (vega supply shocks, risk mngmt constraints, etc) Moreover, note the $VIX- $SPX 30D ATM IV spread; OTM is dragging VIX up

https://twitter.com/FadingRallies/status/1354242862079221762?s=20

1/x) Today is the 3 year anniversary of Volmageddon. (Aside from being my greatest single PnL day lol), it was a critical event that not only changed the volatility trading landscape, but also triggered a volatility regime change in markets that's still in motion today. 2/xThe most well-known aspect of Volmageddon was the blowup of short vol, best highlighted through the destruction of inverse $VIX ETPs: $SVXY $XIV, which lost most of their value overnight. However, these retail products were only a tiny fraction of the broader short-vol complex

1/x) Equity Vols have remained elevated following the March 2020 crash, as we continuously hear about $VIX remaining elevated. The common notion is that this is mostly attributed to hedging demand. However, I've argued that elevated front-end vols are more due to a lack of supply 2/x The constant Vol supply from systematic Vol sellers, inverse $VIX ETPs, implicit short Vol, etc. was first significantly wiped on Volmageddon as short Vol blew up, and again during March 2020. The decline in VIX Futures outstanding Vega highlights the diminished Vol supply.

#ES_F futures depth. Charts like this have been circling around for a while, but I think this is one of the most critical pieces of data that can't be ignored. Highlights the shift that occurred in the markets, and the vulnerabilities that loom from the current lack of liquidity. It's no coincidence that the $VIX spike in Feb 2018, Volmageddon, coincided with this shift in declining liquidity and triggered money flowing out of equities. Volmageddon marked a regime change in volatility, and hence declining liquidity that creates more fragile equity markets