It’s been an extraordinary year of turmoil in global debt and equity markets. But some truths remain eternal. When prices fall, liquidity dries up; it gets harder to get out of unwanted positions when everyone else wants to do the same. Even bargain hunters looking to buy when there’s blood in the water may struggle to put on positions.
It’s a widely acknowledged problem in fixed income markets, thanks to the large number of individual bonds. One big corporation could have scores of individual securities outstanding, some of which hardly ever trade. Bank dealers won’t warehouse the risk and so investors have to make prices to each other.
In Europe, illiquidity begins at quite a high level of market capitalization
It’s not supposed to be like that in equities, where that same issuer has just one stock and trading has long been electronic and handled by algorithms. But the rarely acknowledged truth is that it’s just as bad in equities as in bonds.
In Europe in particular, where trading is fragmented between dozens of national stock exchanges and multi-lateral trading systems (MTS), the quality of equity markets can be surprisingly poor.
