Liquidity and volatility Sisters or cousins?

The impact of volatility on markets, like that of liquidity, has consumed seas of ink and countless hours of deliberation; a technical but inconclusive debate. I attempt a simple narrative on the relationships between the one and the other, and their effects on the price of securities and consequently on market performance. 

I concede in advance to any criticism that I may be criticized for lack of technical rigor and oversimplification, but I try to give my average client an explanation that he can take home and begin to see the markets with less fear. Just as you would explain the tides, the phases of the moon, and thus understand the ocean better, and probably enjoy it.

When two persons have the same father or mother, they are siblings. When the father or mother of one is at the same time the sibling of the father or mother of the other; the two people are cousins. In both cases the people share genes, as children there is much resemblance, but as cousins there are important differentiating elements.

Volatility and liquidity, whether of a security or a market, certainly share common elements that can be said to make them sisters. Perhaps the most important is the changing, open and multilateral nature of the market itself, which is the product of thousands of interactions between buyers and sellers.

Here, the more trading there is - more buying and selling - the more liquid the market will be. In other words, a security can be traded with a reasonable level of certainty that it will be traded and collected. But at the same time, this activity of an active market generates variations in prices, just as winds and rains move the sea and with it the magnitude of the waves. Hence, following the parallelism, a lot of wind and tides can create waves where it is difficult or dangerous to navigate. Almost as in instruments or markets, which have high volatility, and require expert management to invest in them.