Liquidity issues have been at the forefront of potential market pitfalls for months.
Banking analyst Dick Bove said Monday that investors could be about to see just how bad things can get.
As Wall Street suffered through another brutal trading day, the vice president of equity research at Rafferty Capital Markets asserted that liquidity, or the ability to keep cash flowing and match up buyers and sellers, is posing perhaps the biggest challenge ahead.
Bove said he hopes buyers step in to stem the damage. Otherwise, the consequences could be severe.
"If this buying surge does not develop, however, there is nothing to stop a massive move to the downside solely due to lack of liquidity in the markets," Bove said in a note to clients. "At this moment, I would strongly caution to remain on the sidelines until a definable source of new funding is determined to maintain or bolster stock prices."
Bove puts the blame in two places: Technology and high-frequency trading, whose "participants may now control overall market activity in the short run" as well as government, which has eliminated "any possibility of either private sector firms or the Federal Reserve providing liquidity to the markets.
"At its base, the key problem is that the historic protections that once existed in the markets to prevent massive downslides have been removed," he said. "This country's claim that it has deep and liquid markets is being put to the test."