A Challenge for Equity Markets on Both Sides of the Atlantic: Can Liquidity be Augmented, Volatility Better Controlled, and Price Discovery Sharpened?

Abstract After suggesting that optimizing equity market structure remains a work in progress (as it has for the past five decades), the paper focuses on liquidity provision – a critical determinant of market quality – and its associations with intraday volatility and price discovery. Controlling intraday volatility and sharpening price discovery is of critical importance, it is not a simple matter, and it depends on market structure. After considering each term separately, we call attention to the public goods property of price discovery, set forth the traditional suppliers of liquidity (market makers, high frequency traders, and limit order placers), and contrast continuous and call auction trading. As liquidity is widely thought to be insufficient in equity markets in the US and Europe, we stress that listed companies should provide supplemental liquidity for their own shares and, to this end, we address a proposal that formalizes a corporate involvement.