Market Opacity and Fragility: Why Liquidity Evaporates When It Is Most Needed

Thu, 01 Jan 2026 00:00:00 +0000

Research question and motivation: The paper asks why market liquidity sometimes behaves in a stabilizing way (an illiquidity hike curbs liquidity demand and attracts liquidity supply) but on other occasions “evaporates when it is most needed,” degenerating into a disorderly run for the exit and a flash crash, often with no fundamentals news. Motivated by flash events (the May 6, 2010 US flash crash where the Dow Jones fell about 9% intraday; the October 15, 2014 Treasury crash; the August 24/25, 2015 ETF freeze; the 1987 crash; and the COVID-19 Treasury market dislocation), Cespa and Vives argue that lack of transparency about order flow is a key ingredient that can jam the “rationing” function of the cost of trading.

Xavier Vives | Macro Paper Warehouse

Market Opacity and Fragility: Why Liquidity Evaporates When It Is Most Needed