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Feb. 09, 2026

For decades, the U.S. equity market has been regarded as the world’s most liquid and efficient. Europe, by contrast, is often described as fragmented, a patchwork of national markets struggling to compete with a unified American system. But what does the data say?

Photo by: Johanna Säll

In a new working paper, Björn Hagströmer (SHoF/Stockholm University), Jonathan Brogaard (University of Utah) and Abalfazl Zareei (ESCP) examine differences in market structure and liquidity across the U.S. and Europe, with a particular focus on where European, and Swedish, equity markets perform well, and where structural frictions remain.

One Market vs. Many

A key difference between the U.S. and Europe lies in market organization. In the United States, equity market listings are highly centralized. Virtually all stocks are listed on either the New York Stock Exchange or Nasdaq, creating an integrated national market. Europe, by contrast, is comparable in size when considering the European Union together with the United Kingdom, Switzerland, and Norway, but remains divided into largely national exchanges.

“Europe is still, in practice, 20–25 local markets rather than one truly pan-European market,” Hagströmer says.

For European firms, this means that a listing on a domestic exchange, for example in Stockholm, does not automatically reach the full European investor base. This fragmentation has implications for visibility, investor access, and trading dynamics.

What Do We Mean by Liquidity?

Liquidity is often treated as a single concept, but in practice it captures several dimensions of how easily assets can be traded. The research evaluates liquidity using three complementary measures:

- Investor holding periods, which reflect how frequently ownership changes
- Trading costs (effective bid–ask spreads), capturing the cost of immediate execution
- Price impact, measuring how much prices move in response to trades

Each metric captures a different aspect of market functioning, and together they provide a more complete picture.

“Liquidity is a concept that can be measured in many different ways,” Hagströmer concludes.

A Surprising Result: Europe Holds Its Own

Contrary to common perceptions, the results show that large European firms compare favorably with U.S. firms on several liquidity dimensions.

Using trading-cost and price-impact measures, European large-cap stocks are, on average, cheaper to trade than comparable U.S. stocks. While ownership turnover is higher in the U.S., this does not necessarily translate into lower trading costs.

“Both Swedish and European large-cap firms show, by some measures, better liquidity than comparable U.S. firms, which is somewhat surprising,” Hagströmer says.

This finding challenges the common argument that Europe’s equity markets are inherently less liquid for large, established companies.

Small Firms and Sweden’s Position

For smaller firms, liquidity remains more challenging across all markets. However, Sweden stands out positively relative to the European average, particularly in the small- and mid-cap segments.

One important factor is household participation. Swedish households are unusually active equity investors by international standards, a feature that supports market liquidity across firm sizes.

“Sweden has built an investment culture where many households participate in the stock market,” Hagströmer says.

Institutional design also matters. Simplified tax structures, such as the investment savings account (ISK), have lowered administrative barriers for retail investors and encouraged long-term participation.

Fragmentation: Problem or Feature?

Not all forms of fragmentation are necessarily harmful. Competition between trading venues can improve efficiency. However, fragmentation in regulation, supervision, clearing, and settlement increases complexity and raises costs, especially for cross-border investment.

In the U.S., post-trade processes such as clearing and settlement are highly centralized. In Europe, they remain dispersed across multiple institutions, increasing operational frictions.

“Market structure matters for liquidity and complexity matters for cost.”

Looking Ahead: A Truly European Market?

From a policy perspective, the findings point to a key challenge: enabling European capital markets to function more like a single market without undermining effective local institutions.

A more integrated market could:

- Broaden the investor base for European firms
- Lower entry barriers for non-European investors
- Improve capital allocation across countries

At the same time, regulatory harmonization involves trade-offs, as national markets have developed rules tailored to local conditions.

“The challenge is to reduce frictions without replacing well-functioning national systems with a lowest-common-denominator compromise.” Hagströmer says.