So-called “ghost” liquidity is a significant consequence of a multi-market environment, and its existence means that true liquidity may be overstated — a result that should not be overlooked by industry players and regulators, a new study finds.

The European Securities and Markets Authority (ESMA) has published research that examines the phenomenon of ephemeral liquidity that quickly evaporates when an order on one market is executed, leading to the immediate cancellation of similar orders on other markets.

ESMA’s review of data on European exchanges and major alternative trading systems (ATSs) finds that more than 4% of market depth is “ghost liquidity”, and that on ATSs the share is higher (between 6% and 7%).

“We find that simply measured consolidated liquidity exceeds true consolidated liquidity due to the existence of [ghost liquidity],” the regulator said.

While the presence of this phantom liquidity doesn’t outweigh the benefits of competition between trading venues and other aspects of a multi-market environment, the report said that ghost liquidity can “reach substantial levels” for certain stocks, traders and platforms.

“Larger and less volatile stocks, high-frequency traders (HFTs), and non-primary exchanges,” are more likely to have higher proportions of ghost liquidity, the study found.

“The greatest ghost liquidity is observed for the HFTs who mostly behave as liquidity takers, on more heavily traded and less volatile stocks, across alternative platforms,” the study added.

The fact that true market liquidity may be systematically overstated is significant to both certain traders and regulators, the report noted.

Further, “The ability to accurately measure liquidity in financial markets is crucial both for traders who want to formulate an optimal execution strategy and for regulators who wish to assess the quality of operation of financial markets,” it said.

Overall, the study suggests that its results show that ghost liquidity is “an economically significant phenomenon,” and that questions have now been raised about “the use of simple consolidated liquidity measures to assess market quality and to measure the effects of changes in regulation.”