Liquidity in Equity Markets: Characteristics, Dynamics, and Implications for Market Quality

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Codes, Standards and Position Papers
August 2015 | Vol. 2015 | No. 7 | 47 pages
Source: CFA Institute
Sviatoslav Rosov, CFA



Two practitioner concerns regarding modern market structure are examined: (1) whether pretrade transparent (or “lit”) liquidity provision is disincentivised by off-exchange trading, thus possibly increasing adverse selection risk, and (2) whether the resilience of liquidity has declined over time. Data from the US, UK, and French equity markets during the period 2010–2014 provide some evidence that off-exchange trading increases the probability of adverse selection on lit venues. No conclusive evidence is found consistent with a decline in the resilience of liquidity.

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