As part of a continuing effort to foster a productive, data-driven discussion about the nature of liquidity and liquidity provision, FIA PTG has released a white paper on Liquidity in Today’s Markets. The paper is designed to establish the concepts foundational to a meaningful discussion of liquidity, including what constitutes liquidity and how intermediaries provide liquidity. It also includes recommendations regarding the general parameters necessary to promote liquidity, thereby establishing a basis for further discussion between market participants and regulators.
FIA PTG member firms trade their own capital in a variety of asset classes and contribute to price discovery and liquid, competitive markets. The group has a unique perspective on liquidity provision and believes that liquidity is crucial to the efficient functioning of markets, transfer of risk, and growth of capital.
After a comprehensive discussion regarding the definition and measurement of liquidity, FIA PTG sets forth principles that are foundational to healthy, liquid markets:
- Artificial latency mechanisms, or speed bumps, can be barriers to liquidity provision;
- Market data should be made publicly available in electronic format in as near real-time as technologically practical;
- Any criteria that explicitly or implicitly excludes an entire category of otherwise eligible market participants should be prohibited as per se discriminatory;
- Platform requirements forcing participants to choose between being a liquidity provider or a liquidity “taker” should be prohibited, and
- It must be possible (at least on an opt-in basis) to interact with the market anonymously, on both a pre- and post-trade basis.
Healthy markets with a diversity of liquidity providers facilitate efficient risk management, capital transfer, and economic growth. As market participants and policy makers consider the degree of liquidity in today’s markets, FIA PTG encourages an analytical approach that evaluates liquidity within the context of the current health, transparency, efficiency, and competitiveness of our markets and weighs potential policy changes not in terms of their ability to match prior market conditions, but rather in terms of their ability to provide liquidity and growth moving forward.
