What one can learn from Dr Reddy – Liquidity Crisis via Orderflow Charts

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On 15th Feb 2019, Dr. Reddy February futures tumbled as much as 30% percent, as the U.S. drug regulator reiterated issues regarding manufacturing standards at its plant in Bachupally, Telangana which accounts for 40-45% of the Dr-Reddy’s US market sales.

Dr Reddy futures made an intraday low of 1874.50 before recovering most of its losses. Most of the market fall happened between 10.00a.m – 10.15a.m yeh 5minutes it is all takes to do the maximum damage.

Before Getting into how liquidity crisis happened in DR Reddy. Lets get to know what is actually liquidity crisis.

The order book is very liquid when a great amount of orders is stored in each side of the order book (Limit Buy orders and Limit Sell Orders) and almost all quotes behind the best one are occupied. In such a situation a market order produces a small perturbation of the system and then a small price adjustment. On the contrary when a liquidity crisis occurs , the order book is characterized by few orders stored and by a large average gap between adjacent orders. In this case even a market order with a small volume can produce a dramatic price fluctuation of several ticks

Source : ResearchGate

Here is 5min Orderflow charts where one can visualize the flow of orders where the red(sell orders) and green (buy orders) stripes shows the fill of market orders and the white zones between those trades represents lack of liquidity or distance limit orders from the orderbook

DR Reddy 5min Charts

And 20 seconds of time is all it got for Dr Reddy to move from 2300 levels to an intraday low of 1874.50 levels before sharp recovery .

Below is the 5-second candlestick charts of how to crash looks like before recovery.

During those 20 seconds a total of 380 lots got traded out of those market buy orders are 268 lots and market sell orders are 112 lots. Buyers started absorbing those panic selling in those 20 seconds.

DR Reddy 5 second Candlestick charts

When price is travelling in a low liquidity zones 112 lots is what required to push the price from 2300 levels to sub 1900 levels.

DR Reddy 5 second Orderflow Charts

Buyers and Sellers Transaction Blocks – 5 second Interval

Conclusion

Liquidity crisis is where market crashes even with low volume. Dr Reddy is one such example one can visualize via orderflow charts. It is improbable to catch such lows even if you think you can time those events to catch in such a short period of time.