For many years, liquidity was often conceptualized through the lens of continuous exchange trading. That framework suggests a system in which liquidity is stable, transparent, and readily accessible, like a placid lake.
In calm markets, liquidity feels effortless. Trading is orderly, intermediaries provide quotes, and asset managers meet redemptions without strain. Stress exposes a different reality. During a liquidity shock, whether a pandemic, a rapid rate repricing, geopolitical turmoil, or some other exogenous shock, the capacity of markets to absorb trading can shrink quickly. Market makers step back, balance sheet capacity tightens, and even routine transactions can become more difficult to execute. Liquidity tightens or disappears at the source.
When this happens, the pressure felt by funds and investors is often visible before the underlying market dislocation is fully understood. And that is where misinterpretation creeps in, leading to sub-optimal policy conclusions. The strain on investment funds, for example, can look like the source of the problem, when in fact it is a symptom of broader market-wide stress.
If we want to understand liquidity as it operates today, we need to recognize how market structure has evolved and how those changes influence the formation and movement of liquidity across markets.
Evolving Liquidity Landscape
There are five separate trends that are shaping the current global liquidity landscape.
Migration away from continuous exchange trading
While the decline in continuous exchange trading is not a new phenomenon, it has accelerated in recent years and is now receiving heightened attention from regulators around the world.
In Europe, the share of total equity trading executed on primary exchanges has fallen to less than a third. Lit continuous trading now accounts for only 17 percent of all trading in the EU and 12 percent in the UK. The United States shows a similar pattern. Approximately 55 percent of trading occurs on-venue, with the remainder off-venue. Lit continuous trading on primary exchanges such as Nasdaq and NYSE accounts for about 35 percent of trading, down from 41 percent in 2019. Overall, lit continuous trading in the United States has declined from 56 percent to 45 percent over the same period.
This reflects a broader shift of activity to multilateral trading facilities, periodic auctions, and a growing share of off-venue trading, including off-book transactions, systematic internalizers, and OTC markets, which together represent roughly 46 percent of total volumes.
The global decline in continuous lit trading is reshaping how liquidity is created, accessed, and sustained. As trading activity fragments across a wider range of venues and protocols, liquidity becomes more dispersed and less concentrated in transparent public order books. While this can increase competition and lower transaction costs, it can also reduce market depth and price transparency, making liquidity shallower and more episodic. This complicates price discovery and may weaken resilience during periods of market stress.
Changing composition of liquidity providers
Another major development affecting market liquidity is the shift in who provides it. In many global equity markets, high-frequency trading (HFT) firms and algorithmic market participants now account for a significant share of displayed liquidity. In the United States, HFT is estimated to account for around 50 percent of equity trading volume, with similarly high levels in Europe and parts of Asia. These firms deploy sophisticated, automated strategies to submit and cancel quotes rapidly, often in milliseconds, and operate across multiple venues simultaneously. Their presence has helped lower bid-ask spreads and improve execution costs during normal market conditions. However, the intermediation model used by these firms differs fundamentally from that of traditional broker-dealers and market makers which has implications for the continuity and reliability of liquidity
Traditional intermediaries often hold inventory, provide liquidity across time, and maintain obligations to clients or exchanges. In contrast, HFTs tend to operate on very short time horizons and are not required to make markets or commit capital during volatile periods. Because algorithmic and high-frequency strategies are designed to minimize risk exposure, they often reduce or withdraw activity in times of heightened uncertainty or stress. For example, during the March 2020 COVID-related market turbulence, several studies documented sharp declines in displayed liquidity and order book depth as many algorithmic participants stepped back, contributing to intraday volatility and wider price swings.
This evolution in market structure means that liquidity is increasingly conditional: available under certain circumstances but not guaranteed across all regimes.
Rise of opening and closing auctions
In many markets, opening and closing auctions have become deep and predictable sources of liquidity, and their share of total trading volume has steadily increased over the past decade. This trend is most pronounced in closing auctions. In the United Kingdom, closing auctions for FTSE-listed equities have grown from approximately 31 percent of daily volume in 2019 to between 40 and 55 percent in 2023. In the European Union, closing auctions account for up to 41 percent of trading in CAC 40 stocks and over 20 percent in the DAX. While the United States shows lower average levels, with around 9 to 10 percent of daily volume transacting at the close, this figure can jump to over 20 percent on major index rebalancing days, such as the Russell Reconstitution.
This shift in trading behavior reflects several structural dynamics, including the rise of passive investing, algorithmic execution, and heightened emphasis on best execution obligations. These auction volumes have become central to institutional investors, particularly index funds, that must execute trades at end-of-day prices to track benchmarks or rebalance portfolios. However, the result is a liquidity profile that is increasingly concentrated at specific intervals, rather than evenly distributed across the trading day, and potentially more brittle outside of peak liquidity windows.
Expansion of private market exposures in regulated fund structures
There is a structural shift in capital markets that is seeing the growing importance of private markets, at the expense of public markets. Since 2000, global private market assets under management have increased from $1 trillion to more than $15 trillion. As a result, companies are staying private longer or choosing not to go public at all, and many listed companies, particularly smaller ones, are being taken private. These changes have reduced the number of new public listings and drawn liquidity out of public markets, especially in the small- and mid-cap segments. Furthermore, as investors increasingly access these private markets, directly or through regulated funds, more capital that would have traditionally flowed into public equities is being redirected, further reducing demand and contributing to the thinning of liquidity in public markets.
To accommodate the long-term and illiquid nature of these assets, fund managers are increasingly using vehicles like interval funds, tender offer funds, BDCs, and listed closed-end funds, which offer redemption on a scheduled or periodic basis rather than daily. This structural design has direct implications for liquidity. Unlike traditional open-ended funds, which must meet investor redemptions daily, these vehicles manage liquidity through predefined redemption windows and volume limits. This reduces the risk of disorderly asset sales during periods of market stress and helps to contain liquidity risk within a predictable framework.
From a system-wide perspective, these vehicles shift a portion of liquidity demand away from daily redemption cycles and toward longer-term, predictable timelines. This helps align liquidity provision with asset characteristics and contributes to a more resilient liquidity ecosystem. At the same time, however, they reflect and reinforce a broader migration of capital away from public markets, raising important questions about the long-term implications for public market liquidity, participation, and price discovery.
Shorter settlement cycles
The transition to T+1 settlement has been a defining market structure development reform that resulted in a structural enhancement to market liquidity. By reducing the time between trade execution and final settlement, T+1 reduces counterparty exposure and lowers the amount of margin required to back settlement risk. In the United States, where T+1 went live in May 2024, the National Securities Clearing Corporation reported a roughly $3 billion decrease in its average daily Clearing Fund requirement due to the reduction in margin requirements for clearing participants. This increases the supply of liquidity by freeing capital that can instead support market-making, trading activity, or financing operations.
As the United Kingdom and European Union prepare for their own transitions by 2027, and as other jurisdictions across Asia-Pacific evaluate their timelines, these changes will reshape the plumbing of financial markets in ways that may help strengthen resilience and improve the availability of liquidity when it is most needed.
Overall, market behavior is increasingly episodic, cross-border, and technologically complex. This calls for oversight tools that are modern, flexible, and informed by global realities.
Rethinking Regulatory Priorities
Markets will continue to evolve, and regulation must evolve with them. With a clearer understanding of the liquidity ecosystem, five key regulatory priorities come into view.
Regulators should take a holistic approach to market structure reforms. Trading liquidity, funding liquidity, collateral liquidity, and settlement liquidity are interconnected and rules targeting one area of the ecosystem will inevitably impact the others. Many of the current issues associated with liquidity can be traced back to previous regulatory interventions. Taking a holistic approach will help ensure that there are fewer unforeseen consequences from regulatory change that that attempts improve liquidity in one part of the ecosystem don’t exasperate the issues elsewhere.
Focus on supply, not just demand when looking at how to improve market resiliency. We need frameworks that support market resilience by sustaining liquidity provision. This includes rethinking capital and margin rules that disincentivize liquidity provision at precisely the moment it is needed most. “Risk-proofing” funds through mandatory anti-dilution tools, stricter liquidity buckets or redemption gates will not ensure liquidity if market makers and dealers exit during stress. Liquidity policy cannot be limited to the users of liquidity; it must also address the conditions under which liquidity can be provided.
Regulation should align with new infrastructure and realities. Continuous quote-driven trading is no longer universal, and policymakers must resist the temptation to try to roll back the clock with overly prescriptive rules. Instead, policymakers should focus on ensuring that markets remain transparent, accessible, and competitive across all trading environments.
International dialogue is essential. Effective oversight today must reflect the global character of modern market structure. As the experience of COVID-19 and recent rate shocks shows, market stress does not respect borders. Liquidity risks may emerge in one market and transmit rapidly across others. In this environment where capital flows and risks are more interconnected than ever before, regulatory responses must be coordinated, calibrated, and grounded in a shared understanding of how today’s markets function.Policymakers need supervisory approaches that can keep pace with cross-border liquidity flows, data-driven trading, and the evolving architecture of market intermediation.
Foster innovation. Market structure is going through a period of tremendous change and new technologies, such as tokenization and distributed ledger, will only accelerate things. Policymakers shouldn’t fight these developments and push them outside the regulatory perimeter. Instead, there needs to be a space for responsible innovation in trading protocols, settlement arrangements, and liquidity-enhancing technologies. Regulatory coordination can help mitigate this risk by promoting common data standards, facilitating interoperability testing, and ensuring integration with existing clearing, settlement, and reporting systems. The objective is to ensure that innovation strengthens, rather than fragments, the channels through which liquidity flows.
Final Thought
Granted, when Joni Mitchell sang, “you don’t know what you’ve got ’til it’s gone,” she was talking about the loss of nature in Hawaii. However, the lyric also perfectly describes liquidity. It is something that markets often take for granted until it is gone. This is why it is incumbent upon the industry and policymakers alike to ensure that liquidity continues to be life blood of capital markets.
If we are to build markets that serve investors in all conditions, we must recognize where liquidity resides, how it is changing, and what it requires to thrive. That means focusing on supply, embracing evolving market structures, and ensuring that regulation is fit for the world we are rapidly entering.
Eric J. Pan is the president and CEO of the Investment Company Institute and an adjunct professor at Columbia Law School. This post is based on his Keynote Speech at the Australian Securities and Investments Commission (ASIC)-Monetary Authority of Singapore (MAS) Symposium on Clearing Mandates & Trading Liquidity – A Global View (December 5, 2025). The views expressed in this post are those of the speaker and do not necessarily reflect the views or positions of the Investment Company Institute or its members.