Which country has the most liquid equities market?

There is a widespread belief that US equities markets are the most liquid in the world. Looking at average daily volumes traded, it certainly feels that it must be right, by quite some margin.

However, let’s test one specific aspect of liquidity: Lit exchange liquidity available to a sophisticated SOR that can achieve 100% fill rates on a swipe.

Dataset description:Jan 20, 2020- Jan 22, 2021

Single stocks from 4 markets: US(NYSE,ARCA,EDGX,EDGA,BYX,BZX,NQX,BX,PSX), Europe ( all primary venues plus CXE, BXE, Turquoise, Aquis), Japan( TSE, SBIJ, CHI-X Japan), Korea.

We simulate instantaneous execution of test order of a “representative” order size vs aggregate book of relevant venues.

“Representative order size” is designed to be something that neither will likely trade through a very large number of levels, nor always be absorbed by top of book. We test two setups order size= 1e-6*free float and order size= sqrt(free float in USD). While not particularly pretty the latter actually makes more sense, as while visible liquidity for a stock with 1 bln USD free float is smaller that that of a stock with 1 trln USD free float, it’s certainly not by a factor of a thousand. Either way results do not change qualitatively.

 Each point on the chart represents average execution costs in a single stock (where order size is a function of this stock size as defined above), and bold lines are a semiparametric regression of these costs onto free float itself.

We assume representative execution costs of an aggressive order ( although they don’t affect the overall picture meaningfully, except for Korea due to 11.5 bps Stamp Duty tax/ FTT).

As you can see, after controlling for the company size, instantaneously available lit liquidity in US equities market is inferior to Tokyo Stock Exchange and Europe, and even to Korea for small stocks( below 1 bln USD free float). 

In fact for small stocks the conclusion is strongly in favour of concentrating all liquidity onto a single CLOB, as both US and Europe do badly there, and even FTT in Korea doesn’t affect this conclusion.

Furthermore, majority of large cap stocks in Korea are tick constrained, which does increase spreads for relatively small orders we are considering.The flipside of this is 1% of ADV can be executed in a single clip in Korea, something that would require a costly sophisticated algo in Europe, US and Japan.

Note finally that fixed costs of accessing this liquidity in the US (market data, colos, sophisticated SOR technology etc) is different by orders of magnitude, especially compared to Japan and Korea.