Why it matters
Volatility is the working definition of risk in most of finance. Position sizes, capital requirements, margin calls and risk models are calibrated to it, which gives it a mechanical role: when measured volatility rises, a large set of institutions is obliged to reduce exposure regardless of what anyone thinks about prices. Selling caused by that obligation raises volatility further. This feedback is why volatility events tend to be abrupt rather than gradual.
It also carries information about conditions rather than direction. Sustained low volatility indicates that participants agree — positions accumulate, hedging looks expensive, leverage becomes cheap to carry. Those are the conditions under which a surprise has the largest effect, which is the sense in which quiet markets are described as fragile. The observation is about positioning, not prediction.
The relationship to liquidity runs in both directions. Thin markets amplify moves, and large moves cause market makers to widen quotes and reduce size. Neither is straightforwardly the cause of the other; in stress they occur together.
What to watch for
Volatility is not loss. It is dispersion, and it counts upward moves identically to downward ones. Equating it with danger imports an assumption that is often reasonable — declines tend to be sharper than advances — but is not part of the measure.
Implied is a price, not a forecast. The VIX and similar measures are derived from what options cost. That price includes what buyers will pay for protection, which is demand for insurance rather than an expectation of movement. Implied volatility persistently exceeding subsequent realised volatility is the normal state, not a market error.
Regimes shift, so historical calibration expires. A volatility level that was extreme in one period can be unremarkable in another. Models fitted to a calm stretch systematically underestimate what follows, which is a recurring rather than an occasional failure.
Low is not the same as safe. Falling volatility is often read as reassurance. It describes the recent past, and it describes the conditions under which leverage accumulates.
Realised volatility can be computed from any public price series; implied measures such as the VIX are published by the exchanges that calculate them, with history available through FRED.