REALITY CHECK ON FINANCIAL MARKET LIQUIDITY
The widely accepted definition of financial market liquidity is the ability of market participants to undertake securities and derivatives transactions quickly without triggering large changes in their prices, and in line with their intrinsic value.
It is characterized by tight bid/offer spreads, high transaction volumes, and the resilience of markets to recover swiftly from shocks. It is not to be confused with ‘monetary liquidity’, which as per the ECB is the ‘quantity of liquid assets in the economy, which is in turn related to the level of interest rates’, as well as central bank provided liquidity also known as quantitative easing (QE).
The gyrations of asset, energy and commodity prices in reaction to the recent news flow from the conflict between USA and Israel and Iran has been an extreme, but nevertheless perfect demonstration of what happens when market liquidity suddenly and totally disappears: price action is highly volatile, bid-offers spread widen sharply, and market depth (being the volume of bids and offers below the best prices) is severely impaired. This is what happens in a crisis situation, but there are a broad array of other factors which have and will continue to shape and develop market liquidity in evolutionary terms.
THE 2008 GLOBAL FINANCIAL CRISIS (GFC)
The 2008 Global Financial Crisis (GFC) prompted a very sharp shift in bank regulations, so as to avoid a recurrence of that sort of event, primarily by raising bank capital requirements, and by largely banning banks from proprietary trading (or outright speculation), even if the poorly worded legislation also impaired banks' ability to ‘make markets’, i.e. facilitate trading by non-banks. That said, over the past decade, banks provision of credit facilities to investment, private credit and hedge funds still leaves them heavily exposed to credit cycles and market crises, just less directly than at the time of the GFC, and at least optically makes their balance sheet exposures look less risky, and in compliance with the array of KYC (‘know your client’) regulations. The demise of Credit Suisse thanks to the Greensill scandal, the deposit run on Silicon Valley Bank, the collapse of MFS and the ‘gating’ of withdrawals from various Private Credit funds (e.g. Blue Owl or at Blackrock) all serve as a reminder that many risks remain in the financial sector, which should not be dismissed as being largely due to ‘bad actors’.
THE 2008 GLOBAL FINANCIAL CRISIS (GFC) PROMPTED A VERY SHARP SHIFT IN BANK REGULATIONS…
27 | ADMISI - The Ghost In The Machine | Q2 Edition 2026
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