I have read and heard several times that liquidity dried up in the bear market of 2008/2009. It has been mentioned on this forum that especially the liquidity in micro/small caps dried up and that implies that people couldn’t sell when they wanted to. My concern is that a backtest does not mean much if the liquidity is not there in real-time.
I was not invested and not following the market too closely at that time, so I don’t have first hand experience. To see how bad it could get, I created a custom series that shows the median liquidity of the P123 MicroCap universe. Surprisingly, it does not show a very large reduction in liquidity. Liquidity drops, but it bottoms at 2005 (and Aug 2006) levels. You can see the series here: https://www.portfolio123.com/app/screen/summary/1244?st=0&mt=8. The conclusion is the same when I use the average instead of the median and if I filter for mktcap in the range of 50-100 (using the No OTC universe).
So it seems the liquidity was there. Of course you have to take large losses to actually sell your holdings. On the other hand, if you’re buying other stocks at the same time, you’re also buying those at a large discount (assuming they have dropped a similar amount on average as the market as a whole).
My question is, was the liquidity really there to trade when you wanted/needed, and if so, do you feel that the recommendations of backtests and live micro/small cap ports can really be executed during severe market declines?
Thanks,
Peter