Liquidity is an amorphous concept and impossible to measure accurately. Its scarcity is only exposed in times of crisis. But everyone agrees it is shrinking, and this could dramatically push up the cost of trading, widen bid-ask spreads and make it harder for traders to close out positions.
As long as asset prices are rising, as most are thanks to super-easy global monetary policy, this isn't a problem. But it will be if there is a sudden reversal and traders are forced to offload assets only to discover there are no buyers.
"This is a critical problem to the functioning of markets," said Andy Hill, director of market practice and regulatory policy at the International Capital Market Association.
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"Without secondary market liquidity, primary issuance will be impaired. We're in a fragile state now," he said, adding that lower rated corporate bonds, high yield debt and emerging markets are most vulnerable to a crunch.
The potential for a sudden freeze across a range of markets is a growing source of concern and debate among global policymakers and regulators.
They are trying to assess the impact on markets of regulatory changes that force banks to hold more capital and less inventory on their books. Financial market participants say this is curbing banks' trading and their ability to act as market-makers in many fixed income, currency and money markets.
Carry on shrinking
There's an important difference between the sea of liquidity worth trillions of dollars provided by global central banks in recent years and the dwindling liquidity as measured by market trading. In some ways, they are two sides of the same coin.
The former is self-evident. As the Bank for International Settlements said in a recent report, global liquidity is "abundant."
Central banks have printed $11 trillion since 2007, bringing central bank liquidity coursing through the global financial system to more than $16 trillion, according to Deutsche Bank. The European Central Bank is in the process of adding a further $1 trillion and China may act too.
But the latter, essentially a measure of the cost and ease of transacting a particular asset without prompting a huge swing in its price, is much less visible and harder to quantify.