With changes in the economic environment, technological advances, and investor behavior, liquidity in the stock market in 2025 is undergoing significant changes. What is important to note is that, with global trade tensions gaining traction, the international trade landscape is no longer uniform.
Liquidity also falls victim to the deteriorating investors’ sentiment. In many asset classes, we continue to witness more directionless speculative trading patterns that benefit the platforms and providers more than investors, thereby inadvertently discouraging the latter from adopting the highly beneficial, market-stabilizing, and proactive passive investor mindset.
Cash is king. Liquidity is queen
With the real price fluctuations in 2024 being relatively muted, a 1.7 standard deviation shift in the S&P 500 today translates to about a 1.5% change in either direction, occurring roughly 6 to 10 times a year. As I have already emphasized, the international economic picture is growing increasingly complex, but credit conditions remain broadly benign. That should generally be favorable for liquidity funds to remain broadly afloat.
Although central bank rates — and therefore money market and liquidity fund yields — are unlikely to match the highs of 2024, I continue to anticipate healthy levels of cash income in 2H 2025, and certainly above the lows of the 2010s.
The greatest perplexities, however, will be precisely on the regulatory side. We can expect to see an announcement regarding European liquidity fund regulation in 2025; however, the specifics, including when, what, how, and where we stand, remain unclear.
The U.S.’s Securities and Exchange Commission has recently set new requirements for higher liquidity levels, and the FCA in the UK is on the same page. While the European Commission believes that the current levels are sufficient, there’s growing pressure from various sources pushing for more. This move should ideally make liquidity funds safer; however, it is worth noting that evidence so far suggests that even in challenging situations, the existing liquidity levels have held up well. On a deeper level, this could potentially lower the returns that liquidity funds are able to generate.
Furthermore, we observe the emergence of new technologies and algorithmic trading, which are impacting asset availability, altering investment patterns, and, consequently, the overall stability of financial markets.
Stock market liquidity in 2025: Sink or swim?
Assessing stock market liquidity is important as far as reaching expected trading profits and individual stock price levels are concerned. In 2025, overall market liquidity has been influenced by a combination of factors, including traditional ones such as monetary policies and interest rates, as well as others. We should not forget that prolonged higher interest rates can reduce liquidity by increasing the cost of borrowing and affecting investor sentiment.
Since April 2025, a new, inherently unpredictable variable has entered the arena, rolling out tariffs and trade policies that appear to target China and the European Union specifically, further aggravating the immediate availability of classic liquidity. In this ‘new normal’, a variety of viewpoints and opinions are being expressed. Yet, one thing is clear: especially in the short term, these new policies are adding to the uncertainty and, as a result, increasing market volatility. The effects of these choices aren’t confined to just a few industries; they create a ripple effect that impacts overall liquidity. As investors and businesses navigate this unpredictable landscape, it’s becoming more crucial than ever to adapt strategies that not only manage risks but also capitalize on new opportunities.
The current economic landscape is grappling with challenges from various angles, affecting liquidity in different ways.
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- Inflation remains a persistent challenge, and its causes extend beyond the prices of commodities. The rampant money printing to cover growing budget deficits has only exacerbated the situation, leading to a decline in consumer confidence and a lack of funding for new businesses. Additionally, the overall health of the global economy — factors such as GDP growth and employment rates — play a key role in shaping liquidity conditions.
- Regulations around capital requirements are also crucial in shaping the new regulatory environment, especially for banks and financial institutions. These rules have a significant impact, affecting the amount of credit available and influencing factors such as profitability and leverage.
- The increasing use of electronic trading platforms and automated trading can also make markets less predictable and affect liquidity — but, arguably, in a positive way.
AI revolution and stock trading: Another liquidity boost?
The world of technology and algorithmic trading is making a significant impact on how stock market liquidity operates. With the increasing popularity of algorithmic trading and high-frequency trading (HFT) algorithms, market liquidity has already risen noticeably. Liquidity received a boost because these systems enable trades to be executed almost instantaneously, helping to narrow the previously sometimes sizeable bid-ask spreads.
Algorithmic trading also plays a key role in making asset prices more efficient. It helps the prices to be more reflective of market conditions, and it does this quickly and efficiently. Thanks to advanced algorithms that can deal with massive amounts of data and time trades perfectly, the overall efficiency of algorithmic trading also lowers transaction costs — something acting in favor of overall liquidity as well.
However, it is worth noting that while algorithmic trading can boost liquidity, it can also lead to increased volatility, especially when the market is under stress and falling sentiment, like now. The swift execution of trades by various trading algorithms can amplify market fluctuations, leading to wider bid-ask spreads and, ironically, reduced liquidity.
Most importantly, there are growing concerns that the potential for algorithmic trading may exacerbate systemic risk in financial markets. The use of highly leveraged algorithms can increase the risk of a sudden liquidity withdrawal, as seen during the 2010 Flash Crash.
On the positive side, rapid technological advancements, including big data handling, AI revolution, and interactive text and data analyses, are enhancing the quality and timeliness of information disclosure, which in turn improves the information environment and promotes higher stock liquidity.
Enterprises’ digital transformation can also improve stock liquidity by easing financing constraints, improving internal control quality, and enhancing information disclosure. The net effect on liquidity will depend on how quickly these technologies are implemented and how comfortably they are regulated.
Future projections for stock market liquidity beyond 2025
First of all, we must regretfully admit that the U.S. Federal Reserve’s approach to interest rates could remain uncertain for a while, with potential delays in reaching a neutral policy rate until 2027. Higher-for-longer interest rates may have a structurally lasting impact on liquidity and market volatility.
Similarly, in the UK, at the beginning of the year, the implied overnight rate, known as the Sterling Overnight Index Average (SONIA), for December 2024 was hovering around 3.45%. However, it didn’t take long for the market to realize that reaching a neutral rate might take longer than expected. In June 2025, the SONIA rate was 4.21%, which is over 70 basis points higher than the consensus forecast a year ago. Similar interest rate uncertainty is now anticipated in the EU, although in this instance, the ECB appears more committed to supporting the geopolitically challenged continent’s economy than combating lingering inflation.
I share the growing concern of a potential bubble burst in the U.S. stock market due to extreme concentration in a handful of stocks. Liquidity constraints could exacerbate the corresponding impact, potentially triggering a chain reaction.
Another critical issue affecting liquidity is global financial flows. Net financial outflows from China may put pressure on the renminbi and regional foreign exchange markets, influencing liquidity in global credit markets.
In its turn, the Bank of England is actively working to reduce its balance sheet by selling bonds and implementing passive quantitative tightening. Since 2022, liquidity has been steadily decreasing, and the Bank of England shows no signs of slowing down the sale of gilts back into the market.
To sum up, while short-term downturns are broadly anticipated, we see more forecasts suggesting a substantial recovery of market liquidity after 2026, driven by deregulation and productivity growth, which will lead to a positive reversal trend.
