Nanex ~ 08-Oct-2012 ~ Update: eMini Depth of Book
Our eMini Depth of Book indicator has proven to be an excellent early warning signal for extreme intraday volatility. It is based on the number of orders resting in the nearest 10 levels of depth for the active Electronic S&P 500 Futures Contract (symbol ES), also referred to as the "eMini". In spite of the VIX making new lows, the depth of book for the eMini has not recovered to levels last seen in June 2011.
On July 8, 2011 we noticed a significant (33-50%) drop in emini depth, which continued to deteriorate and reached a low on August 10, 2011. The depth of book became so anemic that a mere 1,000 contracts would clear out 3 or more levels of depth. We believe this was the source of the extreme intraday volatility in the market during that time and wrote this article about it: HFT is Killing the EMini. In response to that article, some market observers told us that they believed that the drop of emini liquidity was directly related to the VIX, which was setting new highs at that time. However, since August 2011, the VIX has reversed and is now making new lows but the eMini depth of book has still not recovered to levels last seen before July 2007.
The following chart shows the total number of contracts for all 10 depth of book levels averaged over each minute of the day between March 3, 2010 (dark purple) and October 8, 2012 (bright red). Older days colored towards the violet end of the spectrum, while more recent days colored towards the red end.
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