Liquidity risks remain top concern across bond and FX markets

Investors need to prepare for higher volatility in less liquid market.

Central bank's asset purchase program led to one sided bet that has resulted in drying of liquidity in the market. Moreover stricter regulations resulted in traditional inventory holders like banks to reduce their bond and FX exposure.

• Last year on October 15^th, the yield on US benchmark 10 year yield slid from 2.19% to 1.86% without much news to affect the market, and finally got settled at 2.13% in closing. This spooked the market participation and monetary authorities over lack of liquidity in the market.

Buy side is now the liquidity provider instead of investment banks.

Warnings remain plenty.

• JP Morgan chief Jamie Dimon few weeks back warned against lack of liquidity, higher volatilities and flash crashes.
  
  
• Bank of England' (BOE) warned against sharp selloffs in equity markets like September last year.
  
  
• Last night Simon Potter, executive vice president of the Federal Reserve New York, has warned against similar flash crashes in treasury market. High frequency trades (HFT) are also playing their part in sharp fall in prices.

FX market is not immune to liquidity crunches as banks are suffering from stricter regulations and harsh fines over their manipulation of the market, namely FX fixes and libor.

• Swiss franc's move last January when Swiss National Bank removed Euro peg was exacerbated due to liquidity crunch. At one point franc traded 0.74, before settling at 1.03 around.
  
  
• Lot many retail trades were not executed due to lack of liquidity in the market.

Sudden intraday moves in currency pairs without much news, shows signs of strains.

Retail intraday traders should keep their guards tight, as their trades and stop losses remain very susceptible to liquidity driven moves.