Week 6: Illiquidity

Every number you have computed for four weeks assumed a door that always opens. This is the week the course tells you it does not.

29 March 2027rationedhanded to you, never assessed

Your paper account has been lying to you since week 1, and it was the course that arranged the lie. Today it gets corrected, which is why this lecture sits immediately before you defend your arithmetic.

Three things your account pretends#

When you press sell, the paper platform fills you immediately, in whatever quantity you asked for, at the price on the screen. All three are false about real markets, and the third is the one that hides the other two.

A quote is not a price. A quote is an offer to trade a stated quantity at a price — someone will buy 300 units from you at $39.96, and that is the entire extent of their commitment. Sell 300 and you get $39.96. Sell 3,000 and the first 300 go at $39.96 and the rest go to whoever is next, at worse prices, until either you are done or the buyers are. The number on the screen was true for the first tenth of your position.

So the price at which you can leave depends on how much you are leaving with. Nothing in the previous four weeks acknowledged this. Every round trip we computed, every counterfactual you filed, every closing value in your log was priced as though your size did not exist.

And the quantity is not constant#

The quoted size is not a fixed property of the instrument. It is a handful of people choosing, this morning, to stand ready to trade. When the instrument becomes frightening, some of them stop, and the quantity available at any sensible price shrinks — at precisely the moment a large number of holders all want to leave.

This is the shape of the failure: not that the price fell, but that the exit you had priced into your plan was not there when you went to use it. Your position was real. The door was a quote.

Mark your own record#

Go through your position log and add one line at the top:

Every price in this log assumes a fill that is instant, complete, and at the quoted price. None of those is guaranteed.

That asterisk applies retroactively to weeks 2 through 5. It does not make those numbers wrong — the spread you paid was real, the $12.00 was real — it makes them a floor. The real versions are worse and by an amount your account cannot show you.

This one is not on the assignment#

You cannot commit this failure on purpose. Concentration is a number you choose; return chasing is a decision you make; cost drag happens the moment you transact. Illiquidity has to be handed to you by the world, it cannot happen at all on a paper account, and on a $20 real position you are far too small for anyone to notice.

So it is taught and not assessed, and if this semester does not hand it to anyone, nobody’s mark changes. Write “not experienced this semester” in your log and mean it. Knowing which of your losses were available to you and which were rationed is itself part of reading your own record honestly — there are four more of these coming, and week 11 is the one nobody gets.

The session this week#

The loss report crit runs today, before Assignment 1 is due. Bring the log. You will be asked to defend one number in it, and after this lecture you already know the question: what would it have cost you to actually get out?