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Liquidity reflects the ease with which certain amounts of an asset can be bought or sold without exerting a significant effect on its price. Higher market liquidity can be interpreted as a greater collective willingness to execute orders at given prices.

Market liquidity is not directly observable. In addition, market liquidity has multiple dimensions that are hard to capture by a single indicator. CFTC staff reviewed multiple indicators of liquidity, including, but not limited to, trading volume, bid/offer spread, and depth. High liquidity may manifest itself as high trading volume, narrow bid/offer spreads, and/or high depth of the order book at successive quotes.

As discussed below, preliminary analysis shows that between 2:30 p.m. and 3:00 p.m., trading volume spiked, bid/offer spreads widened, and depth declined. The latter two observations are consistent with a significant decline in liquidity with the bulk of that decline occurring between 2:42 p.m. and 2:45 p.m.

a) Trading Volume

CFTC staff has analyzed trading volume and transaction prices for the June 2010 E-mini S&P 500 futures contract during the period 2:30 p.m. to 3:00 p.m. on May 6, 2010.Figure 30 presents transaction prices and trading volume for 10 second intervals from 2:30 p.m. to 3:00 p.m. for the June E-mini S&P 500 contact on May 6, 2010. According to Figure 1, between 2:30 p.m. and approximately 2:45 p.m., volume rose significantly while prices fell. Between 2:45 p.m. and 3:00 p.m. volume fell and prices rose.

Figure30:PriceandTradingVolumeintheJune2010E­miniS&P500FuturesContract

Source: CMEGroup

During the 30-minute period from 2:30 p.m. to 3:00 p.m., trading volume was about 10 times the average daily trading volume for the same intraday time period calculated over the prior 30 days. High trading volume by itself can be interpreted as an indicator of improved liquidity. However, Figure 30shows that high trading volume was accompanied by significant volatility of trading volume. This suggests a dislocation of market liquidity, with high volume fluctuations at the same time that orders are executed deep into the limit order book. Consequently, liquidity indicators based on the

characteristics of the limit order book may provide additional information about the liquidity dynamics during 2:30 p.m. to 3:00 p.m. on May 6, 2010.

b) Bid/Offer Spread

The bid/offer spread is a liquidity indicator based on the characteristics of the limit order book. Specifically, the bid/offer spread is calculated as the difference

between the highest quoted price to buy (bid) and the lowest quoted price to sell (offer or ask) one or several contracts or securities. This price difference is a measure of the cost paid by a buyer or a seller who wishes to transact immediately. Similarly, the second, third, fourth, fifth best bid and offer prices represent transaction costs to the buyer and seller willing to buy at increasingly lower prices and sell at increasingly higher prices. Figure 31presents the bid/offer spreads for the first best and fifth best quotes of the June 2010 E-mini S&P 500 specifically focusing on the period of 2:43 p.m. to 2:48 p.m. along with transaction prices. The spread is measured in ticks—minimum price increments; for the E-mini S&P 500 contract the tick is equal to 0.25 point. The smallest bid/offer spread is one tick (0.25 point) and the smallest spread between the fifth best

quotes is 9 ticks (2.25 points).43 Until approximately 2:45 p.m., both spreads were at their minimums, as is most often observed in this market. At 2:45:28 p.m., the best bid/offer spread widened to 26 ticks (6.5 points). At this time, Globex Stop Logic

triggered a 5-second reserve state in the E-mini S&P 500 contract. Following the reserve state, the first and fifth best quote spreads increased to the period maxima of

approximately 11 ticks (2.85 points) and 33 ticks (8.25 points), respectively.44 By 2:50:40 p.m., both spreads declined to about 1 and 9 ticks (0.25 and 2.25 points), respectively.

Figure31:Bid/OfferSpread(inTicks)andPriceintheJune2010E­miniS&P500Futures Contract

Source: CMEGroup

c) Depth

Depth is another liquidity indicator based on the size of orders in the limit order book. Depth is calculated as the sum of quantities of the orders resting at a particular price point—e.g., best bid or offer, second, third, fourth or fifth best bid or offer—in the limit order book. High depth (resting orders) on both sides of the limit order book may (but need not) result in higher trading volume (executed orders).

43 _{Bid/offer spread between 2:30 p.m. and 2:43:10 p.m. and 2:48:10 p.m. and 3:00 p.m. are at their}

minimums.

44 _{These spread measurements are graphed at 10 second intervals, with each data point representing}

Figure 32 illustrates the depth at the fifth best bid and offer quotes between 2:30 p.m. and 3:00 p.m. According to Figure 32, significant order imbalances existed between orders to buy and orders to sell. In addition, around 2:45 p.m., depth declined

dramatically, but the limit order book became approximately balanced (orders to sell became approximately equal to orders to buy), which is its typical state.

Figure32:Bid/OfferQuantities:5thBestinthe June2010E­miniS&P500FuturesContract

Source: CMEGroup