Overview: market structure issues in market liquidity

Abstract

The behaviour of prices and even the viability of markets depend on the ability of the trading mechanism to match the trading desires of sellers and buyers. This matching process involves the provision of market liquidity. The role of the market maker in providing liquidity is widely recognised, but liquidity can also arise from other aspects of the trading mechanism. In particular, rules and market practices governing the trading process, such as how trading orders are submitted and what trading information must be disclosed, can affect the creation of liquidity. This raises the question of whether changes in market structure can enhance the provision of liquidity. Is there a “Golconda exchange” that provides optimal liquidity?

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