CFA Institute has released a report, "Liquidity in Equity Markets: Characteristics, Dynamics, and Implications for Market Quality," which was motivated by common practitioner complaints about modern equity markets. The perception is that modern market structure has created a set of incentives that disadvantage investors and traditional market participants, such as market makers. Specifically, so-called broker/dealer internalizers purchase retail order flow from brokerages (e.g., your stock purchase made through TD Ameritrade) and fill the orders against their own principal. Only “informed” orders (i.e., those not profitable to trade against) are routed to exchanges, causing so-called “adverse selection” risk.

To understand the effects of these concerns on market quality, we studied the dynamics and characteristics of liquidity across equity markets in the United States, the United Kingdom, and France between 2010 and 2014. CFA Institute policy analyst Sviatoslav Rosov, PhD, CFA, discusses the key study findings in the following clips.