To paraphrase trader Larry Harris, transactional liquidity in the markets is the ability to trade large order sizes quickly, at low cost and time that is convenient to the trader. Many traders consider liquidity the most important characteristic of well-functioning markets.
As a general observation, low liquidity is accompanied by high volatility in price movements, and vice-versa.
Note that traders who need to perform a more comprehensive analysis can backtest
the impact of liquidity on a particular security using the Tradewell platform
This measure of liquidity displayed on the heat-maps is adapted from Amihud’s illiquidity measure
, which is the ratio of absolute close to-close returns to dollar volume (Price * Volume).
This metric is calculated as a the current value ranked over the prior 50 days. A low value indicates high liquidity, while a high value indicates lower liquidity (at the transactional level). In other words, a value that is high implies a large absolute close to close return, but relatively low volume comparatively.
We measure liquidity for each component of a particular index or ETF’s in order to help understand liquidity dynamics underneath the surface.
XLC is an exchange traded fund whose portfolio is comprised of US communications services stocks. This investment seeks to provide the same performance as stocks in the Communications Services Select Sector Index. The index includes companies that have been identified as Communication Services companies by the GICS®, including securities from industries such as telecommunication services, wireless providers, entertainment and media conglomerates.