FINTECH AND THE LIQUIDITY–RESILIENCE PARADOX IN STOCK MARKETS: A CRITICAL REVIEW

Abstract

This study explores the impact of financial technology (FinTech) on the liquidity and resilience of global financial markets during 2014–2024. The analysis covers electronic trading, algorithmic and high-frequency trading, artificial intelligence, big data analytics, digital brokerage platforms, and distributed-ledger technologies, and their impact on transaction costs, price discovery, market liquidity provision, information efficiency, and market stability. Evidence from around the world has shown that FinTech has significantly reduced information and execution frictions and enhanced market liquidity during normal times by enabling faster order matching, providing liquidity to a larger number of investors, and increasing competition among liquidity providers. The level of technology integration in financial systems is evident in global investment in FinTech, which totaled US$239.3 billion in 2021 and US$95.6 billion in 2024, despite the drop. The facts do, however, show an important liquidity-resilience paradox. While algorithmic trading and market fragmentation may lead to lower average bid–ask spreads, some evidence from the large equity markets shows that spreads are becoming more skewed and kurtotic, meaning that abnormally poor liquidity conditions could still occur during a market stress. In fact, the market shock in March 2020 due to the outbreak of COVID-19 was another example of how digital infrastructure can ensure continuous market access while also accelerating synchronized trading, deleveraging, and shock transmission. When assessing the impact of FinTech, cross-country evidence shows that the impact varies with technological infrastructure, market depth, financial development, regulatory quality, and investor involvement. The study finds that FinTech can improve the efficiency of the markets and the liquidity of everyday transactions, but resilient outcomes is not a foregone conclusion. To sustain its contribution, the adoption of efficient regulation, cybersecurity, clear algorithms, fragmented technological platforms, and institutional resilience to handle systemic risks arising from the growing automation and interdependency of financial markets is needed.