as best represented by the fact that there are now more ETFs (Exchange Trade Funds) than there are exchanged listed companies, accompanied by ever larger trading volumes in derivatives (both exchange traded and OTC (Over The Counter) – per se representative of a headlong rush to ‘commoditize’ and ‘financialize’ everything. Notably, as was the case with Investment Trusts in the 1920s ahead of the great crash, noble arguments such as a new instrument or fund promoting the democratisation and/or liberalisation of finance, improving financial inclusion, widening access to financial instruments that had been previously the exclusive preserve of the wealthy are frequently cited in promotional materials. While such claims are not in principle false, they rarely offer detailed insights into liquidity in times of stress, as even if comprehensive ‘back testing’ has been conducted, these will generally rely on modelling of tail risks in prior crises, but each crisis always has individual features, and complex systemic and temporal interconnectivities, which can potentially metamorphosize into cascading risk events, not infrequently due to being in the wrong place at the wrong time, rather than either due to incompetence or malfeasance.
ELECTRONIC TRADING
Electronic trading has many positive aspects, from improving transparency in asset price formation, transaction speeds, automation, enabling more complex trading strategies, be that arbitrage or hedging related, lowering transaction costs and human input errors, as well as removing trading hours constraints. But equally there are inherent vulnerabilities, most obviously technical or power failures, as well as heightening volatility often due to faster transaction speeds and higher trading volumes that result in adverse price movements, potential manipulation due to misinformation (be that intended or poorly sourced), scams and other fraudulent activity. Automated and algorithmic trading can also be too reliant on historical trends that all too often fail to account for the reality of live market trading, and result in poor performance. One might add that there are also quantitative trading models that primarily rely on price momentum, which also exacerbates exaggerated price movements, and in many cases has little or no interest in examining the underlying fundamentals of a given asset. Such trading activity can be argued to add liquidity, but it is by nature fickle, opportunistic and its intermittency may ultimately undermine perceived liquidity, and in the case of real world assets such as commodity, energy and shipping prove to be economically and commercially harmful.
The proliferation of electronic trading platforms and ETFs may enhance access, but the growing numbers also serve to fragment and even undermine liquidity, above all at crisis moments. Ultimately, it is important to understand that each innovation that may ostensibly improve efficiency, transparency, regulatory oversight or market liquidity will also carry some disadvantages. Haldane’s observation that ‘risk, like energy, tends to be conserved not dissipated, to change its composition but not its quantum’ should always be a cornerstone of any analysis of liquidity.
Marc Ostwald E:
marc.ostwald@admisi.com T: +44(0) 20 7716 8534
THE PROLIFERATION OF ELECTRONIC TRADING PLATFORMS AND ETFS MAY ENHANCE ACCESS, BUT THE GROWING NUMBERS ALSO SERVE TO FRAGMENT AND EVEN UNDERMINE LIQUIDITY.
29 | ADMISI - The Ghost In The Machine | Q2 Edition 2026
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