Markets Should Be Worried About the Music Stopping

Several factors are roiling world markets right now, from fears of a possible U.S. recession to erratic policymaking, trade tensions and general uncertainty. But the unusual size of the moves -- regularly on the order of 1% to 3% -- is being heightened by something else: the struggle to find someone with whom to trade.

The decline in trading liquidity is evident in several metrics. Volumes have declined. Since 2007, average daily trading in U.S. Treasury bonds (measured as a percentage of market size) has fallen by over 60%. Trading in traditionally less liquid corporate and high-yield bonds has shrunk by similar amounts. The number of small trades (under $1 million) has grown, suggesting a lack of partners for larger deals.