First the good news: global index implied volatility has fallen sharply as markets rallied from their lows, even if volatility is by no means low. Markets both in and out of equities are pricing in a longer duration of high volatility; the September VIX future is back near its high even though the May future has fallen 20 points.
Now the not so good news: as Goldman points out, this week's historic collapse in oil prices is a reminder of the importance of liquidity and market technicals, with the bank observing that "in equities that concern remains centered around the final minutes of US equity trading sessions" as we will show shortly. Alas, as the next several charts shows, both liquidity - where market depth is a near record low 25 cent wide bid/ask almost all of the time, with less than $10MM observed on the bid/ask side...
... and volumes have plunged, with the latter suffering a dramatic reversal from the March surge, as April volumes have been closer to the lower-vol January than to the early part of the current crisis.
Furthermore, Goldman warns that dramatically slowing corporate buybacks can be one additional obstacle on the path back to low volatility. The five-year US Treasury yield hitting a new low this week and SPX dividend markets implying that it will take 8 years for last year's dividend payout level to be re-gained are both indications of markets pricing in an extended period of economic dislocation.
In any case, as hinted above, one place where this extremely illiquid market can be observed most clearly, is what happened 10 minutes before the end of every trading day. Back in 2018, Goldman found that emini top of book depth was considerably stronger at the end of each trading day than earlier. However, in recent weeks, this phenomenon has eroded considerably, leaving much less "extra" liquidity in the last half hour of trading, even before the coronacrisis. Weakened end-of-day liquidity was likely a potential contributor to the recent end-of-day volatility dislocation.
Which brings us to the most notable outlier during the cash session: the 3:50pm market on close announcement, where we have seen especially violent market moves when an outsized market on close imbalance either for sell ...
... or to buy ...
... was announced.
Goldman confirms that something fishy takes place right at that moment when the MOC imbalance is disclosed, writing that "3:50 PM has been a daily flashpoint as equities enter their end-of-day process", and explaining that the unusual volatility taking place at the end of each trading day has been particularly tied to 3:50 PM, when the NYSE begins its on-close trading procedures. And as shown in the chart below, over the past month, SPX futures have moved a median of +/- 45 bp in the 3-minute period surrounding 3:50 - far more than any other time of day.
In other words, as long as the MOC is the day's most anticipated market "trigger" event, liquidity will be a pale shadow of its former self, and since institutions are unlikely to participate in a market where an outsized order would move the entire market, it means that retail investors are in charge and levitating stocks back to all time highs... at least until the trapdoor is pulled beneath them once again.