Liquidity can freeze like the water in Davos

An excellent article ran today in the FT “Illiquidity will amplify magnitude of next bear market

Sergio Ermotti – UBS

“Global market liquidity can freeze like the water in Davos,” said UBS chief executive Sergio Ermotti at the 2019 World Economic Forum in Switzerland.  The article goes on to say that Mark Carney, Governor of the Bank of England says that there is about £30 trillion (yes, with a ‘t’) tied up in ‘difficult-to-trade’ investments.

Have you noticed how much liquidity is being talked about these days?

Of course, liquidity is only available when participants have some idea of where the market is going, but ultimately there will be a price at which someone will buy something in a bear market and somewhere someone will sell in a bull market. We want to be able to bring liquidity to markets where liquidity is thin or does not exist. It is not as sexy as building a space rocket or an electric car but it is important.

There is a disconnect between investing and the ability to divest of those investments. However, there are massive liquidity pools at every level of investing if the right ecosystem is available.

For example, 10 years ago the P2P lending industry barely existed. Now, I would estimate globally, on those platforms that have a secondary market and those platforms that are performing securitisations of their debt, that there is at least £1 billion+ per annum of P2P debt traded.

However it is fragmented, much of it is locally traded (i.e ‘on platform’) and there is little to no standardisation as there does not need to be in a fragmented system. These elements create problems in a downturn;

Access and timing – if potential liquidity providers don’t know about the platform’s market and requirements, how do they get involved and if they do, would they be able to do it quickly?

Secondary liquidity – if a liquidity provider is now in a market and does know the requirements how do they assess the liquidity risk that they are taking in a closed ecosystem?

Poor pricing – in a closed ecosystem with a limited amount of potential liquidity providers the risk for those providers becomes higher, therefore prices become priced lower.

I could go on, but I think you probably get the point.

It may not be the best thing to take a short term loss by selling early, but it is a damn sight better than not being able to get out at all. It’s not all doom and gloom either, what if you bought debt in a business that is now doing tremendously well, is the price you bought at now the right price? Probably not, but unless there is someone who is willing to buy at a premium how to you get the ‘right’ price if exiting your debt?

Same applies for an amortising loan. What if you took the risk on a 90% LTV factory purchase at 14% p.a, for example, and now that LTV has amortised out to a 40% LTV. That loan when sold before the term has a different risk profile and therefore a different price, but unless the market is structured to allow such pricing (i.e selling your debt at a premium) how is the risk-taker rewarded when existing a loan?

ASMX is building the solution for platforms globally. We are building access for traders, access for institutional investors and we are putting retail lenders in the centre by opening up liquidity for their loans. ASMX will allow better pricing for debt, superior access for liquidity providers and all this will help a globally fragmented marketplace mature into something almost as cool as a space rocket… almost.



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