Market Liquidity: Don’t Know What You’ve Got ‘Til
It’s Gone

Abstract

The author discusses the lessons the global financial crisis taught about the precious but fragile liquidity of capital markets. Debunking myths about long-term investors’ liquidity needs and the role of hedge funds and high-frequency traders in supplying liquidity, the author argues that the most important source of liquidity is unleveraged contrarian investors who are willing to take the other side of a trade. He warns that the growing homogenization and concentration of market participants may be endangering the investor diversity and robust market infrastructure needed to preserve reliable sources of liquidity.