Remember: Volatility and liquidity tend to be inversely correlated.

That’s part and parcel of the “doom loop” dynamic behind the cascading character of modern market selloffs.

When markets are thrown into turmoil, liquidity deteriorates, magnifying the impact of a given sell flow. Because volatility dictates those flows, vol shocks can be conducive to a self-fulfilling prophecy. It’s not a coincidence that many measures of US equity market liquidity never recovered from the February 5, 2018, vol event — “Volmageddon,” as it’s affectionately known, in market circles.

In that context, it won’t surprise you to learn that liquidity deteriorated meaningfully into the equity market fireworks and vol spike around Donald Trump’s “Liberation Day” boondoggle.

The figures, from Goldman, show two simple liquidity metrics: The bid-ask for the median S&P 500 stock and futures top-of-book depth.

On April 7 — i.e., last Monday, at the height of the post-“Liberation Day” market scare — the bid-ask spread for the median S&P 500 stock was 22bps, which Goldman’s David Kostin noted was the widest since the original COVID panic.

Top-of-book depth, meanwhile, slipped to the low-end of the post-Volmageddon era, and now ranks just 3%ile on a two-decade lookback. As Kostin reminded clients, that means the market’s ability to absorb large order flows is limited, or at least without moving the price significantly.

The figure below shows a current estimate (the blue diamond annotation) of Goldman’s in-house liquidity metric, which uses the average of trailing three-year z-scores for the two metrics mentioned above, as well as the median stock’s liquidity ratio relative to its three-year average.

As you can see, liquidity’s nearly as impaired currently as it was during the pandemic drawdown.

“Equity market liquidity has deteriorated in a negative feedback loop with recent volatility,” Kostin went on, underscoring the point made here at the outset, and adding that “sudden deteriorations in the liquidity environment are often associated with a wider distribution of returns.”

And that closes the loop, figuratively and literally: A wider distribution of returns is synonymous with higher realized vol, and higher realized vol dictates mechanical deleveraging flows which, when they hit an illiquid tape, move the price, pushing vol even higher, and around we go.