Collateral liquidity is causing huge concerns at the moment and this could really move towards the top of the industry to do list by this time next year. OTC is very likely to suck even more liquidity from the market and with regulatory and political interference with short selling and stock borrowing and lending; the liquidity problem in collateral could escalate very quickly.

What is the answer to this problem? How do the markets increase collateral liquidity?

With short selling and subsequent stock lending and repos it’s pretty hard to see how liquidity could be increased, but one potential solution might be to initiate increased trading activity between the retail and wholesale markets. The current market conditions have seen private investors take flight from the market with even institutional investors is reticent.

How could the investing community be re-engaged with the markets?

One method might be to create a central market that focuses on particular investor needs - low cost and low risk with a decent chance of a return on investment. Such a concept has been muted by the NYSE Euronext stock exchange recently with their retail matching facility (RMF), although I grant you this is probably not fully to investor needs just yet and will need to be integrated within the whole market. However, if Stock Exchanges could release the huge mountain of private investor assets into the markets it might plug a bit of the collateral hole which is emerging. The question is, apart from NYSE Euronext who else could join in and create a stock market geared to investor needs and not those of the casino mentality which currently has seemed to pervade the market?