What We Can Learn About Market Liquidity By Looking At Everyday Life

Joe Weisenthal (0:08)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:14)

And I'm Tracy Alloway.

Joe Weisenthal (0:15)

You know, it was really fun last week. You know, really enjoyed getting to record an episode in person for once, but now, of course, we're back to our normal ways.

Tracy Alloway (0:26)

It's very sad. I miss you, Joe.

Joe Weisenthal (0:28)

Likewise, and here we are recording a podcast on opposite sides of the world. But okay, moving on.

Today, I think we're going to be talking about something that we've covered in a few episodes and that I think is one of your favorite themes.

Tracy Alloway (0:41)

Okay, because you said that, I know exactly what it is.

Joe Weisenthal (0:46)

So we don't have to play the guessing game like we sometimes do?

Tracy Alloway (0:49)

No, it's liquidity, right?

Joe Weisenthal (0:52)

Right.

Why is this one of your favorite topics? It's funny, we've talked about it a lot, like this sort of, it's particularly the bond market, bond market liquidity, market structure. We've talked about it a lot, but I guess I've never asked, like why is this a subject of such fascination for you?

Tracy Alloway (1:07)

Okay, I can tell you exactly why, because liquidity is almost the essence of markets. Like if you think that a really simple definition of liquidity is the ease of buying or selling something, maybe without affecting its price too much, that's exactly what markets are, right? And the other thing is, you get all these really interesting motivational dynamics at play and lots of design issues. And even though you can think of the perfect market structure to suit a particular asset class or transaction, there might be different players involved who don't wanna see that market structure come to fruition.

So it's a fantastic mix of human behavior and markets, I think.

Joe Weisenthal (1:53)

So basically this idea of liquidity, the ease with which one can buy or sell an asset at a given price, if we can understand why it exists or why it doesn't, then we can sort of understand the entire structure of the market, who the different players are, what their different motivations are, et cetera.

Tracy Alloway (2:11)

That's exactly right. Are you telling me we have someone on the show today who knows the answer to this question?

Joe Weisenthal (2:17)

Well, we might. I don't know if we have the answer, but we're going to try and get closer to the answer.

But I think we're gonna do it in a cool way, because obviously normally, we might talk to someone we have, who's like an expert in how the bond market works or stock market structure. Today, we're going to talk about how this concept of liquidity and market structure exists in our everyday lives. So not just in what we call financial markets, but in the sort of how we see this concept everywhere and the things we buy, transact in, et cetera.

Tracy Alloway (2:52)

That sounds absolutely amazing. And I hope we can come up with some real life parallels for, for instance, lack of liquidity in the corporate ball market.

Joe Weisenthal (3:00)

That's what I'm hoping for. I'm hoping that by understanding how liquidity exists in everyday life or lack of it, that we can then translate that back into maybe some new insight into the financial world. So without further ado, I want to bring in our guest. His name is Karthik Shashidhar. He is the author of Between The Buyer And The Seller, a book that examines some of these topics. Karthik, thank you very much for joining the Odd Lots podcast.

Karthik Shashidhar (3:28)

Hi Joe, hi Tracy. I'm glad to be here.

Joe Weisenthal (3:30)

So Karthik, what did you think about our introduction? Did you think that Tracy's explanation for why liquidity is such an important aspect of the market to understand sort of parallels with why this interests you?

Karthik Shashidhar (3:44)

Absolutely, I think she's kind of bang on and I think the definition of liquidity she used is also like precisely the one that I use in my book.

But yes, liquidity I think is an important topic because it's around us everywhere. It's around us in pretty much every market that we happen to transact in on a daily basis. And like as Tracy just explained, it's a wonderful combination of markets and human behaviors.

Tracy Alloway (4:09)

So we always used to write that liquidity is kind of a nebulous concept and people have different definitions of good and bad liquidity. So why don't we just jump right into it to clarify the concept.