The idea of liquidity evokes different images and sensitivities among investors, traders and market-makers. Anyone who has traded has experienced a “squeeze” where the market raced away from him as the number of buyers or sellers vaporized. No liquidity. Anyone who has invested has seen a price move away from them just as they place their order. No liquidity.
Let’s start by providing a basic description of liquidity.
Liquidity is “instant access” to buy or sell an item without materially moving the price at the time of transaction. It is simply a function of supply & demand. Liquidity manifests itself in the ease with which you can trade without impacting the price and the narrowness of the bid-offer spread. The narrowness of the bid-offer spread is often an indicator of the speed with which one can enter and exit a position. This is not always the case in today’s market as there is a great deal of spoofing that occurs [HFT firm routinely post and pull orders to give the illusion of tight spreads]. Liquidity is largely impacted by volatility, particularly large negative price movements.
In the past liquidity was also a function of the willingness of “market makers” to buy when a seller wished to sell and to sell when a buyer wished to buy. Historically, market makers would stand on both sides of a market to provide orderly entry and exit. However, as the speed of the markets increased with computerization, the capacity of the traditional market maker to keep pace diminished — machines took over. Traditional market makers died off, replaced by the HFT firms like Citadel who have eagerly filled the gap with nanosecond quick algos manipulating the order book [queue jumping and front running]; using fake orders to fool the buyers and sellers (spoofing); using cash incentives to attract order flow from broker-dealers; and colocation fees & volume fees to exert influence over the exchanges in which they operate. We spoke of these things in our last article so we won’t shoot a dead horse.
But has this made for a better and more liquid market. No. Measures of liquidity have dropped consistently for the last several years. Average trade sizes are down. The market is more fragments. In the USA, NBBO Reg NMS has stacked the deck in favour of HFT. I have heard people argue that the bid-offer spreads are very narrow today hence liquidity is better. However, when you remove the layers from the onion, you will find that oftentimes the other side of the quote does not exist. It is only there for illusion.
So how does the AbacasXchange improve liquidity — naturally by creating “the infinite coincidence of supply”. I once had an economics professor who said “supply creates its own demand” — Say’s Law. If you produce an item you get paid for that work. This leads to demand for other goods and services.
And that is exactly what the AbacasXchange intends to do. Today’s transactions are binary, confined by borders, bulky and inefficient. I can buy GOOG for USD; I can sell GOOG for USD. How boring!
Imagine if you would a world where you can sell GOOG directly for any other asset in the market place. Your order book is a series of contingent orders that represent what you wish to hold, at what prices you are willing to buy and your ladder of desired assets. I sell GOOG and AAPL and am willing to hold USD, GBP, BTC, BT, GOLD, MSFT etc. This creates an infinite set of order possibilities and converts any asset into a currency. So now when I go to my local vendor, I can pay him in GOOG, USD, GOLD, SPDR, BT or anything else that he may wish to receive for payment.
Why is this better?
- You reduce the stress on the supply of a security, hence mitigating the price pressures
- You can gain exposure in other markets and currencies more rapidly
- You have the means to convert any asset into a ready made payment currency.
When Mark Van Roon, Founder of AbacasXchange, filed for USPTO [granted in 2007] a multi-party matching algo, the patent embodied the concepts which the AbacasXchange is building today. We call it “indirect trading” and it is the cornerstone of our liquidity model. The blockchain has made the vision, both a possibility and a reality.
Come join us on this journey.
AbacasXchange Any Asset Anywhere Anytime.