What does declining touch sizes and widening spreads indicate about the depth and resilience of current European market liquidity?
Since early 2025, European markets have experienced a notable decline in touch sizes (-29% year to date), alongside widening spreads (+13% year to date). These developments can provide important insights into market liquidity, although they need to be viewed through short-term and long-term lenses.
In the near term, smaller touch sizes often reflect heightened risk management by market participants. When uncertainty around fair value increases – due to macroeconomic, earnings, or geopolitical developments – participants become less willing to expose large quantities at prevailing prices. Market-makers, in turn, widen spreads to protect against adverse selection.
By quoting smaller sizes, participants limit their exposure to sharp price moves, reducing the risk of executing at unfavourable levels.
Lower touch sizes do not necessarily imply lower traded volumes. During periods of elevated uncertainty, trading frequency often rises. ‘Liberation Day’ saw resting times to fill shorten significantly (approximately 50%) while trade counts surged. This reflected a shift toward immediacy – investors prioritised certainty of execution and actively mitigated price risk. Notably, flows migrated back into lit continuous venues, and trade sizes fell across all venue categories.
Over a longer period, persistent reductions in touch sizes may offer clues about market depth and evolving microstructure. When viewed alongside aggregate volumes, it may indicate a migration of flow toward non-displayed venues or an increase in passive trading. Parent orders are increasingly sliced into smaller increments to minimise impact.
Conversely, the surge in touch sizes observed in Q4 2024 and Q1 2025 likely reflected strong conviction as investors aggressively allocated new flows into European markets. The subsequent decline since summer may signal a cooling of that trend and a shift toward more passive management of these positions.
From a resilience standpoint, these changes raise execution costs. Trading even moderately sized orders becomes more expensive and more likely to sweep through multiple price levels, amplifying market sensitivity to large trades and increasing volatility. In such conditions, liquidity appears less robust, and the market’s ability to absorb shocks without significant price dislocation is diminished.
How are rising trading costs affecting institutional execution strategies, and what adjustments are being made to mitigate these?
Changing market dynamics – wider spreads, smaller touch sizes, and reduced liquidity on lit continuous venues – have increased market impact costs. Institutions are responding through strategies such as adapting behaviour on lit pools and diversifying liquidity access.
Lit venues remain essential for price discovery and high fill probability, but require more sophisticated interaction. Parent orders are sliced into smaller increments to reduce signalling, while queue priority and deeper price levels are leveraged for better passive fills. Spread-crossing is timed carefully to optimise costs and execution quality.
Liquidity diversification is accelerating. Dark pools help avoid paying the spread and reduce market impact, especially for block trades. Periodic auctions – now 8.9% of European market activity, surpassing dark pools as of October 2025 – offer limited pre-trade transparency and better protection against adverse selection.
Bilateral liquidity is the standout trend, reaching approximately 32% market share. Direct connectivity to market makers and broker-built access layers are helping institutions reduce costs and execute large orders more efficiently.
Looking ahead to 2026, what market-structure changes or liquidity trends do you expect to have the biggest impact on execution quality and investor behaviour?
Several structural changes will shape execution quality and investor behaviour in 2026. Periodic auctions, now 15% of lit market volumes, will continue to grow, influencing price discovery and execution performance. Monitoring how these venues scale will be critical.
Bilateral liquidity, trading one-third of total volumes, may redefine large-order execution. Institutions are deepening direct connections to market-makers, while brokers build tailored solutions to democratise access to this liquidity.
Increasing fragmentation across lit, dark, auctions, and bilateral channels will demand smarter routing, timing, and slicing strategies to manage impact costs. Expect greater reliance on adaptive algorithms and data-driven execution as liquidity becomes more dispersed.