Study casts doubt on liquidity of UK market

A study into the workings of the UK stock market has found that its liquidity is reduced by high-frequency trading, raising concerns that Europe’s biggest equity market is not as deep as once thought.

TABB Group, a research and advisory company focused on capital markets, says that only 65 per cent of turnover in the UK market is actually meaningful and executable liquidity.

The remaining 35 per cent consists of “noise” or reprints of already conducted trades.

The study finds that cash trading is further diluted by a wide range of execution channels, as well as alternative products, such as contracts for difference (CFD).

TABB research analysts Will Rhode and Miranda Mizen, who co-authored the report, find that the true size of the investor market is masked by HFT.

“The combined effort of all these elements is that the UK equity market is not nearly as deep as it may have at first appeared once you extract non-executable liquidity, or noise, and high-frequency trading from the picture,” Rhode says.

Rhode and Mizen say that their study demonstrates the “true size” of the market and should be a wakeup call for regulators to act.

“We selected the UK market since it is the largest in Europe,” Rhode says.

“It has a wide variation of order flow and channel usage as well as the largest use of swap activity. We broke down turnover by execution channel, market participant and by cash equity/swap activity.”