Liquidity in the over-the-counter markets is in a “dire” state as dealers steadily reduce their marketmaking activity, according to buyside firms.

Speaking at an industry conference hosted by Worldwide Business Research last week, buyside traders said that industry-wide deleveraging combined with the impending introduction of more stringent capital requirements had led dealers, the main source of liquidity in the OTC markets, to wind down their inventories, the stockpile of securities dealers hold to facilitate marketmaking.