Liquidity Add-Ons
There are two liquidity add-ons:
Liquidity Schedule: Provides an estimate of how quickly you could liquidate your portfolio.
Liquidation Cost Summary: Provides an estimate of how much it would cost to liquidate your portfolio.
In both cases, the analysis relies on various assumptions.
Liquidity Schedule
The liquidity schedule indicates how quickly you could liquidate your portfolio if you could sell 100% or 20% of the average daily volume in each security, each day. It is very unlikely that you could sell 100% of the total market volume (or sell that much without significantly moving the price), but using 100% of average daily volume has become a standard metric. It is probably more useful for reporting to investors, who might be comparing different funds, or for tracking changes in liquidity over time. While 20% of average daily volume is more reasonable than 100%, there is no guarantee that you will be able to liquidate 20% of average daily volume, either. Using 20% of average daily volume has also become a standard metric.
The add-in tells you what percent of the gross delta-adjusted exposure could be sold. The table also indicates how much of the portfolio would remain unliquidated at the end of 20 days. The “no data” row indicates how much of the portfolio is not being included in the analysis because the securities are missing average daily volume data.
Liquidation Cost Summary
The liquidation cost summary indicates how much it would cost you to liquidate your portfolio. The analysis is based on the liquidation cost of each security, which assume a cost equal to half the bid-ask spread.
In the liquidation cost summary, each position falls into one of four buckets,
Based on Security Bid/Ask: We have a current bid and ask price for the security.
Based on Model Bid/Ask: The bid ask price is based on the underlying security or a model based on historical analysis.
No data: We do not have a current bid and ask from the market or a model estimate. These positions are not assigned any cost in the report.
Cash: There is no liquidation cost for cash. Cash, by definition, is already liquidated.
For more on liquidity risk in general, see Quantitative Financial Risk Management, Chapter 9, by Michael B. Miller (2019).