Wall Street - Reuters / Caitlin Ochs

Is the U.S. Really the Most Liquid Market in the World?

Phil Mackintosh
Phil Mackintosh Nasdaq Chief Economist

Here in the United States, people frequently boast about how the U.S. is the cheapest, most liquid equity market to trade in the world. With stocks trading around $362 billion each day, more than four times the liquidity of Europe combined – and TCA data from Virtu showing buy-side costs are lowest – it seems to be true.

However, is it fair to compare the roughly 6,000 companies listed in the U.S. markets to the almost 900 companies listed in France? Is it even fair to compare trading in Apple to Nokia?

Today, we look at global liquidity, comparing trading in select countries to the U.S. market. The results are interesting.

Chart 1: Trading value and Turnover by region

 

Chart 1

Even in the U.S., it’s not fair to compare AAPL to AAL

First, even if we look at U.S. listings, we see that (generally) larger companies trade more value than smaller companies. That makes sense. By definition, they have more dollars invested.

For example, we can see from the data in Chart 2 that at the end of 2023:

  • AAPL was the largest U.S. company, with a market capitalization of around $3 trillion. It traded around $10 billion each day.
  • AAL, a company with a market capitalization of about $9.5 billion, trades just $396 million per day.

That makes it seem like Apple is far more “liquid” and, therefore, easier for investors to trade.

Chart 2: Comparing U.S. notional trade each day to a company’s market capitalization

 

Chart 2

However, if we plot the value traded vs. market capitalization (above), we see that the dots form a diagonal line. The trendline shows that the ratio of trading to market capitalization (company size) is fairly consistent across all company sizes. It’s something we’ve looked at before – and we call “turnover” in this study. That’s because it’s similar to how companies think of inventory turnover – how many times each year does each share in the company trade?

Importantly, it’s also more comparable to how most investors “size” trades, too, as index weights tend to define how much of a stock each fund should own.

If we calculate the turnover of Apple and AAL, we see their “liquidity” (adjusted for size) is actually much closer:

  • That means, over the course of a year, AAPL trades around $2.5 trillion. Said another way, the total market cap of AAPL trades around 0.82x times each year.
  • Meanwhile, AAL, despite much lower notional “liquidity,” has a turnover of around 10.05x times each year.

In fact, some might argue AAL is a more liquid stock (after adjusting for size). This makes turnover a better way to compare stock trading activity.

Comparing the U.S. to some other countries

Knowing this, we now look at how this works in some other countries. The data in Chart 3 shows a few interesting differences:

  • The U.S. clearly has the largest companies (with more dots on the right-most side of each chart). Those dots are also higher, which boosts the U.S. market’s value traded.
  • Japan, for the size of its economy, has a high number of listings (around 4,000). However, the data shows it has a heavy concentration in micro-cap companies.
  • In contrast, China has almost no microcap companies that fall into our screen for listed market cap, with just a few below $100 million.
  • The distribution of turnover for Korea and China is skewed positively, with many more companies well above their national trendline than for the U.S. and especially Japan.
  • The dashed lines in the middle of each chart show the averages for each country and how different they are.

Chart 3: Comparing trading and market cap for four significant stock markets

 

Chart 3

Comparing turnover of the U.S. with other countries

Now we’ve shown that turnover is a better way to compare trading liquidity across different-sized countries, we compare turnover for each stock by country in Chart 4 (below), where:

  • Countries are ranked by total value traded.
  • Each stock is a dot, with turnover on the vertical axis (on a log scale, so each increment higher is the same multiple increase).
  • The boxes show where the “middle half” of all dots fall (and the median for each country is the line in the middle of the box).
  • The whiskers (high and low lines) cover around 90% of all dots. For every country, there are more dots above the upper whisker than below the bottom, showing some “very liquid” outliers exist in each country.
  • That also means “average turnover” would be much higher than most medians.

This seems to show that, although the U.S. trades the most value of all countries in the world, it isn’t a leader on other metrics.

In fact, countries like China and South Korea seem to have consistently higher turnover than the U.S. Interestingly, one thing all three of these countries have in common is reportedly high retail participation in their stock markets.

Chart 4: Comparing turnover across countries

 

Chart 4

Turnover isn’t as different as you might think

Liquidity is one of the important factors keeping trading costs and costs of capital low. That’s important for companies and investors.

However, comparing companies adjusted for size allows for more fair comparisons of liquidity. That’s important to the debates around just how good the U.S. market structure really is. We all need to remember that liquidity is one reason why the U.S. has low costs of capital, something keeping the U.S. market attractive to companies from all over the world.

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