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[Jhoe]

For the last 6-8 weeks, I've been noticing far wider than usual bid/ask spreads in equities, equity ETFs, equity derivatives, forex pairs, et al. Probably no coincidence that the timing of this development pretty much signaled a top in equities, at least so far. I do not trade fixed income, or related derivs, but I've read on a few blogs I follow about similar observations in the credit markets, particularly in the derivative arena. I started trading in early 2009, and the only time I've witnessed anything like this was, go figure, in early may of 2010, which I personally believe helped facilitate the flash crash of may 5. Since I'm relatively new at trading, I wanted to throw this observation out there to see if anyone else thinks its abnormal or a warning sign, or if its more likely attributable to the absence of volume/trading this time of year. I also want to point out that the areas I'm really noticing it are forex and equity options markets. For example, an index ETF like the IWM (R2k) or the SPY typically trades over 500k options contracts even on a slow day, for the SPY usually more like 1 million, point being that whether you're looking at monthlies, weeklies, puts, calls, at the money, out of the money, in the money, whatever, theres usually above average liquidity associated with such strong volume. And typically the bid/ask spread is no wider than a few cents, although obviously wider than that depending on the price of the option and whether its close to the money or very far out. But for example, I'll look at the IWM July 76 call. From watching/trading options in the IWM on a daily basis, I can tell you that a $3 or so option, as this one is, would typically have a 3-5 cent bid ask spread. Last quote on friday? bid $3.22 ask $3.49, so a spread of nearly 10% of the option price. In currency markets, I'll use the EUR/USD to illustrate, you typically see a bid/ask spread of 1 or 2 10,000th of a euro, and sometimes less than 1, which is why you'll often see the bid/ask in that pair quoted with at least 4 decimal places, or at most 5. However, even around 6:30 sunday evening, spreads were almost 1/100th of a point wide. Say the last trade was 1.4335, the bid would typically be 1.4334 and the ask 1.4335, or 1.4336 at the highest. Sunday, it was more like 1.4327 for the bid and 1.4337 as the ask. Finally, one last reason I'm posting this is to note that these spreads, obviously only in forex so far since US equities aren't open yet, have gotten much tighter as the session progressed. In fact, by 8 or 9 pm the EUR/USD spread was back to where it normally is, or pretty close to it. Its actually tighter today than it was most of last week as I type this around 2:45 am on the east coast. If anyones interested, I'll pass on observations from the US equities session later today. I don't think liquidity in and of itself makes a market more likely to go up--however the absence of liquidity makes a market much more prone to volatility, and eventually selloffs. So it will be interesting to see two things today: 1.) if the forex markets are indicative of an end to the recent lack of liquidity, and if so, 2.) does it mean we're at a short-term bottom in US equities? I'm looking at bullish patterns on the SPX and R2K on daily charts, suggesting around 4-5% upside with the downside limited to 1% or so in the next few weeks, so I'll be looking for any changes in liquidity as I've observed it through bid/asks to confirm or deny my theory for the short term.