A Wild Stock Swing is Magnified by Headline Bots and a Lack of Liquidity

Right now, the stock market is especially prone to sharp and unpredictable movements. This increased volatility is largely driven by two key factors: low liquidity and the growing influence of algorithmic trading systems that react instantly to headlines.

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A prime example of how these forces interact was seen on Monday, when a false tweet about former President Donald Trump potentially delaying tariffs sparked a massive $2.7 trillion rebound in the market. That momentum continued into the next trading day, as U.S. stocks rallied once more.

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With liquidity drying up and market makers stepping back, it's becoming more expensive to execute trades — and easier for even modest-sized orders to shift prices dramatically. As a result, the equity market remains highly unstable. At the start of the most recent trading session, the S&P 500 surged over 3%, demonstrating just how sensitive the market has become.

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“Liquidity is terrible, so anyone with just a decent-sized order is going to move the market,” noted Brent Kochuba, founder of options analytics firm SpotGamma, in a Monday client note.

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When market participants refer to “liquidity,” they’re describing how easily assets can be bought or sold without significantly affecting prices. But during Monday’s turbulent session, that ease of trading vanished, particularly in the options market, where the difference between buy and sell prices (known as the bid-ask spread) briefly tripled. The same lack of liquidity continued into Tuesday, especially during the European trading session.

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This thin liquidity exacerbated a swift and extreme shift in market sentiment, as automated trading algorithms — designed to respond to momentum and rapid price changes — kicked into high gear. According to Benn Eifert, managing partner and co-chief investment officer at hedge fund QVR Advisors, these programs played a major role in magnifying Monday’s volatile rebound.

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“Big trades just push the market really fast,” Eifert explained.

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The options market offered further evidence of this instability. On three separate occasions early Monday, bid-ask spreads expanded more than three times within seconds — a larger move than what was seen during the sharp selloff just a week earlier.

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Eifert added that the way both hedge funds and market makers are programmed to respond to news headlines likely influenced the wild price movements triggered by the fake tariff report. These systems are designed to detect and act on sentiment shifts in milliseconds, setting off chain reactions of buying or selling.

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“You have a daisy chain of buying reactions in response to a headline,” Eifert said. “Algorithms are tuned to react extremely quickly to any kind of headline reversing tariffs.”

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This problem extended into the futures market as well. There, the firms that typically ensure constant liquidity were also pulling back, causing the bid-ask spread to widen — which increases the cost of trading. On Monday, the CME E-mini S&P 500 futures, a key tool for hedging market risk, showed signs of stress. According to data from Goldman Sachs, the depth of orders at the top of the book in those futures contracts dropped to just $2 million at times — a record low.

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That kind of thin order book means that if an investor tries to execute a large trade, like $100 million, they’ll rapidly exhaust available orders and push prices around significantly, Eifert noted.

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Because futures are critical for hedging across the broader market, a lack of liquidity in those contracts can quickly affect other asset classes. This same issue may have helped fuel the rally that took place the following day.

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The dramatic intraday swings on Monday were also a sign of how reactive markets have become to fast-moving headlines — even inaccurate ones. When some news outlets mistakenly reported that the White House was mulling a 90-day delay on recently announced tariffs, stocks reversed course sharply. The S&P 500 climbed from being nearly 5% down to a gain of as much as 3.4%. But when officials denied the report, prices fell again.

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This confusion over whether the administration was planning to delay tariffs highlighted just how fragile investor sentiment is. “It shows how skittish the market mood is,” said Steve Sosnick, chief strategist at Interactive Brokers.

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In the options market, market makers became hesitant to quote prices until they could ensure their positions were properly hedged against the fast-moving equity market. Gareth Ryan, managing director at IUR Capital in London, said that even waiting just “a few seconds” before quoting prices was necessary during such turbulent conditions.

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“Intraday swings of this magnitude on both single stocks and index options make it very difficult to achieve both price discovery and mark-to-market,” Ryan said.

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In short, the market’s current vulnerability stems from a toxic mix of shallow liquidity, lightning-fast trading algorithms, and fragile investor confidence — all of which can cause massive price swings from even the faintest whiff of news, real or fake.

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