Market Liquidity and Structure

Abstract

In Chapter 1 we introduced the concept of dark liquidity and the reasons why it has expanded and developed in recent years. But dark liquidity does not exist on its own—it is part of an entire spectrum of trading liquidity which is built atop specific market microstructures. In this chapter we take a broader perspective on the topic of liquidity and secondary trading in securities, starting with a review of the need for market liquidity and the issues of market impact and information leakage in relation to block liquidity. We will then explore market microstructure, focusing on orders as the fundamental instructions to buy and sell securities and markets as the forums which combine these orders and match buyers and sellers. We will conclude with a discussion of liquidity supply and demand, considering key parameters such as immediacy, depth, breadth, and resiliency. Note that some of these topics will contribute to our discussion of pricing and execution in Chapter 4.