1/x) As $SPX powers through 4K to new ATHs and $VIX cracks below 20, all is well and nature is healing. Yet the irrational ebullience masks over the unresolved and proliferating fragilities lurking underneath the surface that pose a systemic threat to the market structure.
2/x) I've already discussed deteriorating equity market liquidity extensively, but in our overleveraged market the significance and implications of this sinister vulnerability can't be understated. Liquidity –– most importantly market depth, has been vanishing since Volmageddon.
3/x) Volatility & liquidity are reflexively intertwined as I've previously noted. Moreover, this also ties in with gamma exposure. You can clearly see here how a decline in vol supply following Volmageddon moves in sync with option volumes & market depth

4/x) Hence, the complete shift in market structure with diminished liquidity altered how the delta1 flows from hedging gamma impacted price action. Vanishing depth enabled hedging flows to dictate a low-liquidity melt-up environment. This creates the facade of a bullish market
5/x) But in reality, the order book increasingly exhibits a type of convexity, where market depth completely vanishes relative to level in a nonlinear fashion beyond the top of the book. Thus when a side of the book is hammered, prices are impacted asymmetrically by size.
6/x) As mentioned, when offers are lifted it leads to that low liquidity melt-up. However, the true fragility is on the downside. The convexity of the orderbook creates a situation that beyond certain sizes, there is absolutely no bid without moving prices significantly.
7/x) The issue extends beyond an instance of size wanting to get out –– that ultimately won't be too difficult. The vulnerability here is that this is systemic. Positioning broadly is at extremes with excessive leverage that is incredibly concentrated in highly correlated assets.
8/x) And no, this isn't solely about $ARKK. The ARK complex is undoubtedly reflexively fragile due to liquidity, correlation, concentration vulnerabilities... Yet it is merely a microcosm of the underlying chronic disorders in the broader market.
9/x) Forced selling is the only thing that causes markets to crash. Given the extent of leverage that's concentrated in highly correlated assets, forced liquidations can cascade into a reflexive avalanche of liquidation feedback loops into a market that has no depth – no bids.
10/x) We all observed Archegos wipeout due to overextended concentrated leverage. The significance here is in what implies for positioning across the street; this won't be an isolated situation. Even a fraction of this level of deleveraging across the street would be devastating.
11/11 The point here is not to fearmonger. Positioning across markets turns increasingly short convexity & correlation implicitly, while volatility & fragility expands. The reflexivity embedded within market stress is unprecedented – capable of synthesizing malicious deleveraging
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