Liquidity Stress Building Beneath the Surface

By Thomas Sozzi

Basket Spreads Drift Wider Across Market Caps

Large cap index basket bid-ask spreads have pushed out to their widest levels since last October/November (currently in the 70th percentile over the past year), marking a notable deterioration in underlying liquidity conditions even as headline index levels continue to remain stable. The move in small cap basket spreads is even more striking, which are now sitting at their widest since the tariff-induced volatility spike last April (88th percentile over the past year). This underscores a sharper retrenchment in risk appetite and balance sheet deployment further down the market-cap spectrum.

^{Source: Citadel Securities internal data; as of 3/4/2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.}

Futures Depth Falls to Two-Year Lows

Futures are signaling the same shift in liquidity conditions. As Scott Rubner, Head of Equity and Equity Derivatives Strategy, pointed out earlier this week, ES1 top of book liquidity has fallen to the 4th percentile in the past two years. With lower notional size existing on the touch, even modest directional flows could generate outsized impact.

^{Source: Bloomberg as compiled by Citadel Securities, GMI, as of March 3rd 2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.}

Index Calm Masks Elevated Single-Stock Dispersion

Our Global Market Intelligence team has also been highlighting that single-stock dispersion is at extreme levels. Over the past 30 days, the S&P 500 is down 1.5%, while the average stock in the index has moved 8.1% in absolute terms, placing the 6.6% dispersion spread in the 92nd percentile over the past three decades. One month ago, this spread surged to 10.8% – a 99th percentile event and a 3.5σ outlier over the past thirty years.

S&P 500 Dispersion – Still Elevated, But Off the Highs
Two-Year Lookback

^{Source: Bloomberg as compiled by Citadel Securities, GMI, as of March 4th 2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.}

Beneath the surface, they also note that we have seen a much wider distribution of SPX constituent returns to start the year, however these moves are occurring in names with smaller index weights, limiting their contribution to headline performance, and masking the chaos under the hood.

SPX Constituent Returns – Extreme YTD Rallies Have Limited Index Contribution
Sum of Weight (%) Per Constituent Return Range

^{Source: Bloomberg as compiled by Citadel Securities, GMI, as of March 2th 2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.}

Taken together, the signals we are seeing between 1) widening basket spreads, 2) depleted futures depth and 3) the stark contrast between relatively muted index-level volatility and elevated underlying constituent volatility points to a market that is simmering on the surface, but starting to boil underneath.
If an exogenous market shock were to occur and index-level price movement catches-up with the larger, underlying constituent moves we have witnessed, the recent deterioration in liquidity conditions could make the tape more vulnerable to sharp, flow-induced moves.