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One theme Dimon weighed in on is market liquidity, the ease with which traders can buy and sell securities.
He acknowledged that the markets have been facing lower levels of liquidity recently, and indicated that this environment is not going away anytime soon.
“Liquidity has gotten worse and we have seen extreme volatility and distortions in several markets,” Dimon wrote in the shareholder letter.
In the last year or two, we have seen extreme volatility in the U.S. Treasury market, the G10 foreign exchange markets and the U.S. equity markets. We have also seen more than normal volatility in global credit markets. These violent market swings are usually an indication of poor liquidity.
Dimon is not the first to express concern about market liquidity.
Senior figures who have weighed in on the topic just in recent weeks include former PIMCO chief Mohamed El-Erian, Federal Reserve Gov. Lael Brainard, Mark Heppenstall, the chief investment officer of Penn Mutual Asset Management, and Passport Capital investment chief John H. Burbank.
Dimon’s take was optimistic yet a little worrying: “The good news is that the system is resilient enough to handle the volatility. The bad news is that we don’t completely understand why this is happening.”
He pointed to a handful of reasons for the volatility, including fewer market-makers in many markets, market-makers that hold less inventory, the smaller size of trades being made, and heightened trading regulations, among other things.
“One could reasonably argue that lower liquidity and higher volatility are not necessarily a bad thing,” Dimon wrote. “We may have had artificially higher liquidity in the past, and we are experiencing a return closer to normal.”
But one thing, he noted, is clear: “Lower liquidity and higher volatility are here to stay.”
With that in mind, he added, Wall Street needs to be ready for the effects of illiquidity when we do have bad markets – because it’s in times of bad markets that liquidity normally tends to dry up.
On that front, Dimon said, his firm is well-prepared.
“We are not overly worried about these issues for JPMorgan Chase,” he said, adding that JPMorgan’s trading businesses are “very strong.”