The FCA could impose a consistent liquidity measurement on funds
Further to Stephen Kingsley’s letter (July 4): why does the Financial Conduct Authority not let the market determine the liquidity of open-ended funds? Instead of the binary choice of open-ended versus closed-end funds, surely a consistent measurement of liquidity published alongside the redemption terms will discipline the market to price a fund accurately based on congruency of these two measurements. The more illiquid the fund, the worse the liquidity ratio, the more restricted the redemption mechanism.
The FCA could compel all funds to measure liquidity in the same way. This measurement would take into account: (a) weighting — the proportion of total capital invested in each stock; (b) time period — the amount of stock traded in the total market place daily averaged over a fixed time period; and (c) the total amount of stock held by the fund — (c) times (b) times (a) added together for every stock held by the fund is the liquidity ratio. This can be measured either daily, weekly, monthly and so on. Funds can then choose their redemption terms and match them to liquidity measurements that are transparent.
Actual liquidity will change over time. However, at least at the time of acquiring the stock the fund will be compelled to operate within published liquidity parameters.
Proper price signalling is a much better way to discipline the market than the illusion of safety created by binary logic defying regulation.