Feature article: Liquidity – shrinking when it’s most needed A review of liquidity in London since 2016 Summary ► Liquidity is the lifeblood of equity markets. ► Following the events at the Woodford Equity Income Fund (WEIF) in 2019, professional investors, increasingly, focus on liquidity when making investment decisions. ► However, this paper shows that liquidity declined significantly between 2016 and 2022. Our work demonstrates that, in 2016, the total value traded of trading companies listed on the London Stock Exchange (i.e., excluding investment companies and financials) was 60.6% of their average market capitalisation in that year. By 2022, that percentage had fallen to 44.3%. ► Thorough analysis shows this decline is common to the Main Market and AIM, to nine out of 11 of the market capitalisation size bands we have analysed and to nine out of 11 super sectors. ► In some respects, the impact of this decline is more significant for small and mid-cap companies. That is because institutional investors will consider how many pounds million can be easily invested, rather than the percentage traded, when deciding on investments. Thus, as percentage liquidity falls, an increasing number of smaller companies will fall below a minimum threshold. ► We have worked with Winterflood Securities, a major market participant, to reach a deeper understanding of the role of retail investors in liquidity today, via the Retail Service Provider network. ► We consider the consequences of falling liquidity and outline some suggestions to help company management teams improve liquidity in their shares. ► Finally, we briefly consider whether the proposals from the Treasury will improve liquidity.