Exit liquidity shills

One of the most painfully things in the crypto/stocks/everything crash is the huge number of people saying "everything is fine" who were at the same time selling the same things that they were publicly hyping. Why do people do this? And more importantly why do people not recognize this for what it is?

I think the reason that people do this is often to generate exit liquidity and the reason that people don't understand this practice comes down to not understanding how liquidity impacts the markets.

What is liquidity?

Lets say you have an asset that you want to buy, you have some money aside to buy that asset. In order to get that asset you have to find a seller who is willing to take what you are offering.

It is possible to live an entire life without understanding how liquidity impacts prices, this is because most individuals don't encounter situations where their individual buying or selling decisions moves the market.

Say you go to the grocery store and want to buy say a carton of milk, in this case it appears that if you buy more or less that the prices are going to be the same. But on an economy wide level this is not so, if you wanted to buy an enormous amount then the available supply could run out, your purchase would impact the overall level of demand and the act of your purchase would drive up prices.

This ends up being a critical dynamic in purchasing things like stocks when you are managing a large portfolio, if you decide to try and purchase everything at once you could substantially impact the price of the stock you are purchasing to the upside which means that you'd get less of the stock than if you purchased it over a slightly longer time frame. As a funds manager you have to consider not just the profitability of a security but how big a position you can actually establish in that, because there will be very real limits to this.

In terms of risk management liquidity matters a lot, say you want to exit a position then you'll have to be able to actually sell that position. People in their day to day lives tend to take this for granted because on an individual level it's pretty easy to sell small amounts of things since there doesn't have to be much demand out there to match a small supply. For example imagine that you are interested in say antique violins and you have one that you are willing to sell, finding a buyer might be a bit difficult but you probably are able to sell your item. But again when you are dealing with large volumes everything changes, imagine you have ten thousand antique violins, there just might not be ten thousand buyers at that point in time at all. Selling all of this position would either have to be done over a longer timeframe or done at a discount, perhaps a very steep discount. In this case if you add a lot of supply on the market level you have to discount it to sell it all.

This ends up being a dynamic that's especially important in the collectibles and art world. It might not be possible to sell off a large position of say famous artworks from a specific artist without having to steeply discount the prices, this just isn't the sort of market where there's endless demand.

What is exit liquidity?

When you have a sufficiently large position it can be hard to find enough buyers to match the amount you want to sell.

In lower liquidity markets being able to sell your entire position for the price you want is not guaranteed. In illiquid markets you might not even have enough buyers to sell at all. So there's an enormous incentive here for drumming up demand if you have a large position you are attempting to liquidate.

With a large enough position it starts to become very economically attractive to start to pay people to advertise for you. In recent times we have seen this strategy with various groups paying "influencers" on social media to talk up their products. Some groups are so brazen as to even mention paying for reviews and positive feedback in their prospectuses. In important ways this is different from advertising in the sense that many of these "influencers" are not being honest about their motives and who's funding them. In essence many of the are monetizing their base of followers by selling this base of followers out. It should be no surprise that a lot of people have become very angry at those same "influencers".

But when large enough amounts are being sold that would move large international markets we are talking about a lot of money changing hands. Paying off some people to lie to their followers ends up being a very cheap price to pay if it generates more liquidity to exit a position. I think fundamentally this is why the practice has become more popular. Throw in the new dynamics of information moving fast on the internet and it would almost be surprising to not see this sort of behavior.

I think the word "shill" is a good one here, a definition is as follows:

One who poses as a satisfied customer or an enthusiastic gambler to dupe bystanders into participating in a swindle.