Creating a standard definition
Measuring market liquidity is challenging, with no market standard yet in use, either from a methodology or measure perspective. Traditional measures such as bid-ask spread or aggregate trading volumes do not provide enough granularity in isolation to allow accurate assessments of market liquidity. The solution requires a multi-faceted approach. Increasing regulatory focus and a spotlight on reduced fees have forced market liquidity higher up many firms’ agendas with these measures becoming an increasingly vital part of firms’ decision making processes.
A lack of transparency in many markets makes evaluating liquidity a challenge. This is particularly acute in markets primarily trading OTC (Over The Counter) where it becomes challenging sourcing consistent data even on a consolidated basis. Liquidity measures for different asset classes can vary significantly as a function of the trading styles in each market and the market dynamics. We hope that the content contained within this guide will give you a better understanding of market liquidity risk as well as some of the ways to better manage it.
In order to make optimal business decisions, firms require current and appropriate information. One of the main challenges investors face today is gaining access to relevant data required to manage market liquidity.
In normal conditions, some sectors of the market may appear to have a lot of transaction flow from which liquidity measures can be assessed. However when conditions change, or securities have little or no transaction data, the problem becomes more acute: data supporting estimating transaction costs, available trading volumes or days to liquidate become sparse.
Adapting to changing market conditions and filling the gaps in markets with little or no turnover is therefore one of the key hurdles to overcome.
