Why liquidity is a public good

Liquidity is what lets you trade quickly, in large amounts, for little money, and with little effect on the price. You can look at liquidity in different ways:

At the instrument level, it looks like tight bid-ask spreads, shallow price impact, and ready depth.

At the venue level, it seems that matching engines, auctions, market making incentives, and strong surveillance keep spreads tight, which leads to low cancel failure.

At the system level, it is the ability of balance sheets and infrastructure to handle flows without causing fire sales or gridlock.

There are five dimensions of liquidity in the literature: tightness, depth, immediacy, breadth, and resiliency. Those parameters are directly related to the costs that investors pay and the price that capital issuers get. Liquid markets lower discount rates and make it easier for everyone in the market to share risk, not just the trader who places the next order. So, liquidity acts like a public good: each trade has good effects on price discovery and risk transfer that help everyone in the market.

The connection between the cost of capital and the cost of capital is not just a guess. Since Amihud and Mendelson made the spread-return tradeoff official, there has been a lot of evidence in stocks and bonds that investors want to be paid for being illiquid. There is a direct link between a security's spread and its expected returns. To get investors to put money into a security, the spread or price impact must be wider or higher. These required returns go directly into the hurdle rates that determine how much money a company and a household can make. Better liquidity lowers those obstacles on its own, making it easier for real investment to happen.

Stress on a market shows what it really is: a public good: Things go wrong when system liquidity runs out. Issuers have to pay a lot more to borrow money, and investors have to pay off their debts. This is a great example of the March 2020 dash for cash. Treasuries are usually the safest place to keep money, but their liquidity dropped as leveraged trades unwound. The Federal Reserve had to step in with backstops to restore order because the benefits of liquidity were greater than the private sector's willingness to provide it in a panic.

The illiquidity premium: its past and its role in society

Mechanisms/Measures

Three sets of measures have become more important over the past few decades, and each tells the same story:

Amihud's ILLIQ uses daily data to figure out how much price changes affect each unit of volume. This makes a clean predictor for both cross-sectional and time series data: More price impact means higher expected returns, but negative returns happen when overall liquidity gets worse.

Pastor and Stambaugh create a market-wide liquidity factor that sets the price for the cross section by punishing stocks that move with liquidity shocks.

Acharya and Pedersen create a liquidity-adjusted CAPM that includes four liquidity betas. This means that it looks at both level illiquidity and how returns and liquidity change together.

These measures together show that investors want a higher price for stocks that are hard to sell right now or stocks that become harder to sell when times are bad.

Microstructure models can elucidate this: In dealer and limit order markets, the spread makes up for the risk of having too much inventory and the risk of choosing the wrong stock. The sequential trade model by Glosten and Milgrom connects the bid-ask spread to differences in information.

Kyle's model makes clear the permanent price effect of informed order flow and the role of liquidity providers who need to be paid to stand in. When you put these friction points together into portfolios or the whole market, they show up as required returns. The premium goes up as the assets become less liquid. The premium is money that you pay to cover the risks of execution, inventory, and funding that come with stress.

In bonds, the connection between illiquidity and yield spreads is direct. Corporate bonds that don't trade very often or need big price cuts have higher yields. Structural models say that a big part of credit spreads is due to liquidity and how it changes during the business cycle. One reason why liquidity provision policies in credit markets can change the cost of borrowing is that they can.

Regime shifts and case studies

The illiquidity premia and liquidity risk are not fixed; they fluctuate based on dealer balance sheet capacity, regulatory frameworks, market structure, and technological advancements. The Flash Crash in 2010, the crash in March 2020, and the crash in October 1987 all showed different problems.

In 2010, broken order flow and cross-market feedback loops caused extreme transients. This led to the Limit Up-Limit Down plan and the harmonization of single stock circuit breakers.

March 2020: common exposures and leveraged basis trades ran into problems because of balance sheet limits. As a result, officials were pushed to create new standing repo and foreign central bank liquidity facilities to make the system more stable. The extra money that investors want when the market is stable can go down as soon as the system adjusts. The premium gets bigger as the fragilities get bigger. (IOSCO 2002; SEC DERA LULD 2017; BIS 2020; Treasury 2024).

Street is pre-emptively building those guardrails into its wrapper and listing standards, so instead of waiting for something to break and someone to step in and change the rules, Street is a liquidity preserving design from Day 1.

Access rules and unintended inequality

The story of how we got here - 1933 Act to modern updates

After 1933, the United States set up a two-track system. Public offerings need to be registered, audited, and reported on all the time.

Private offerings can skip registration if they only go to accredited investors or use narrow exemptions.

Regulation D put this structure into action, and Rule 501 made the idea of an accredited investor based on income and net worth screens.

The limits set in the early 1980s were: $200,000 for an individual, $300,000 for a couple, or $1 million for a net worth that didn't include the primary residence. The 2020 changes made it possible for people with certain professional licenses, knowledgeable employees of private funds, and spouses who pool their money to pass the test. This moved the test away from just looking at wealth.

The JOBS Act made two ways for more people to get access to things, one of which is regulation crowdfunding. It lets certain companies sell small amounts through middlemen on web platforms, but only up to a certain amount and with certain rules and oversight. Regulation A, which was changed a lot in 2015 and again in 2020, lets Tier 2 issuers do mini public offerings with less reporting and a $75 million annual limit. The SEC raised the Reg CF offering cap to $5 million in 2020 and allowed special purpose vehicles to be used in some cases to make cap tables easier to read. These changes made it possible for non-accredited investors to invest in early-stage equity in a controlled way.

Who was included, who was excluded

Wealth screens are still there: The SEC staff looked at how the percentage of accredited U.S. households grew over time while nominal thresholds stayed the same. Based on data from the Survey of Consumer Finances, staff estimates that about 12 to 13 percent of households meet the current rules for net worth. If thresholds aren't indexed, a bigger share is expected in the next ten years. If retirement assets aren't counted as part of net worth, the qualifying share goes down by several points. This shows how sensitive classification is to definitions. That sensitivity is important because it determines who can access illiquid private deals and, by extension, who can earn illiquidity premia.

Evidence from Regulation Crowdfunding and Regulation A expansions

The distributional mapping is very clear: the top 10% of U.S. wealth holders had a net worth of about $1.56 million in 2022. By definition, households below that line are mostly not allowed to participate in private placements. Even for people who are above the line, real participation requires knowledge, networks, and the ability to deal with illiquidity. You don't have to think that private deals always do better to see the inequality mechanism: when a channel with a higher expected return or different risk becomes legally rationed, the groups with the most wealth get the most gains.

Proof from Regulation Crowdfunding and rules A expansions

Many people were afraid that access widening would lead to a lot of fraud, but that hasn't happened. The results are mixed and not very big. The SEC looked at the first few years of Reg CF and found only a few cases of fraud. However, the agency warned that the early data were limited and that some cases may not have been reported. FINRA has taken specific enforcement actions against portals and issuers. In general, gatekeeper rules and platform monitoring can keep risk at a certain level, but as volumes rise, more surveillance and education are needed.

New SEC data through 2024 show that Regulation A brought in about $9.4 billion in reported proceeds from more than 800 issuers over the ten years since 2015. More than 1,400 qualified offerings sought more than $28 billion in total. About 3,869 offerings that filed closing forms for Regulation Crowdfunding raised about $1.3 billion, with the average successful raise size being around $346,000. The amounts are small compared to Regulation D, but they are important for first checks and for communities that aren't in traditional venture hubs. In terms of demographics, Reg CF issuers tend to be young and small. A lot of them had two to five employees and had only raised money from investors a few times before. We are still looking into issuer survival and exit rates, and the quality of disclosure varies. Official data show that fraud is still rare, but the SEC's enforcement docket shows that problems do happen and that portals can be a way for fraud to happen if controls fail. There is progress, but there are some caveats.

Reg A and CF show that there is a need for and a history of regulation: there is a framework for retail access, but it is not fully developed, is scattered, and is on a small scale. Street can fill the gap by turning startup equity into a wrapper that is liquid and clear. Street puts in strong guardrails so regulators can feel safe about letting more people in. There is already a proven market for retail access to raises; Street is just speeding it up.

Paternalism vs autonomy - a synthesis with guardrails

Rawlsian fairness and Hayekian discovery

Two philosophers establish the ethics governing trade eligibility. Rawls advocates for fundamental liberties and equitable opportunity. Inequalities are acceptable solely when associated with positions accessible to all under conditions of equitable fairness and when they advantage the least advantaged, in accordance with the difference principle. In capital markets, fair opportunity means not keeping access to channels with high expected returns behind wealth gates forever. The difference principle permits restrictions when they clearly mitigate foreseeable harm to the least advantaged, such as by curtailing fraud or personal devastation.

Hayek teaches about the problem of knowledge. Information about risks, skills, and preferences is spread out and not always clear. Decentralized markets find out this information through prices and participation. Central gatekeeping makes that discovery impossible. A system that makes a regulator decide who is smart enough to handle a certain risk has the same problems with knowledge as any central planner. It should favor regulations that facilitate the emergence of local knowledge while mitigating potential harm.

Thaler and Sunstein come up with a third option. Choice architecture can help people make better choices without forcing them to do so. Defaults, standardized labels, cooling-off periods, and comprehension checks can help people avoid making mistakes they know they will make while still giving them freedom. The ethics here are not about treating adults like children; they are about making the rails so that markets can include more people without taking advantage of limited rationality.

Steelman both sides and name the tradeoffs

The paternalist case is strongest when it comes to correlated error and cross-subsidy. Retail investors make the same mistakes over and over when it comes to new products. When a lot of people make the same mistake, the costs are shared through fraud investigations, platform failures, or political backlash. Restrictions protect the system and give it time to work. The case for autonomy is strongest when it comes to fairness and new ideas. Wealth screens keep capable adults out and focus on the upside in small networks. They also cut down on the number of ways that society can learn which rules and tools really work. The ethical synthesis is a set of rules that lets more people participate while limiting harm and other effects that are easy to predict. That means using tools like risk budgets, brakes, transparency, and surveillance instead of outright bans.

Design principles for safe inclusion

Tools for disclosures, comprehension checks, risk budgets, float discipline, vesting, and market stability

A principled access framework turns ethics into plumbing. There are a lot of design moves that happen in strong markets.

Disclosures in layers. Put a short, standardized summary at the top that explains payoff, dilution, rights, fees, conflicts, lockups, and liquidity risks in plain language. For expert readers, there should be deeper layers. Add tags that machines can read so that middlemen can compare similar things. Investors can better understand risk by combining labels with standardized risk icons and expected loss ranges. Behavioral evidence favors the utilization of straightforward templates in lieu of narrative prose exclusively.

Checks for understanding. Before someone can trade a higher-risk instrument for the first time, they should have to take a simple quiz about the instrument. Don't permanently block users for making mistakes. Instead, make the throttle position smaller until the user passes and make sure they know about lockups and loss risk. That keeps freedom while lowering the chance of making a mistake.

New accounts have risk budgets and position limits. Set a limit on the amount of assets that can be exposed to illiquid or high-variance instruments at first. This limit should go up over time as the person learns more and stays longer. Broker rules already limit margin for new accounts; this logic now applies to product risk as well.

Discipline and vesting in float. Supply shocks can wipe out illiquidity premia. Time-based vesting and predictable float increases lower the risk of dumping and price manipulation. Market makers can quote tight spreads more easily when issuance schedules are clear. The value was clear during IPO lockups, and token markets have learned the lesson again.

Incentives and auctions for market making. To have tight spreads, you need a balance sheet and competition. It should be cheap to post quotes on both sides and expensive to fade. Call auctions at open, close, or event times to make it easier for small investors to buy and sell without losing money. Maker-taker fees and clear auction rules have helped keep liquidity at the venue level for a long time.

Routing conflicts and transparency. Require public order routing reports that show how venues are connected and how much they pay for order flow. Also, give customers a simple choice of routing settings that focus on getting the best price or improving the price. The U.S. Rule 606 system is a starting point that can be built on.

Controls for volatility. Limit Up-Limit Down price bands and harmonized circuit breakers stop moves that get out of control and keep feedback loops from going across markets. Price collars and auction reopenings can help stabilize discovery for new assets without stopping trade. The LULD plan shows how to do it.

Watching things in real time. When making access easier for more people, it's important to be able to recognize patterns in spoofing, layering, wash trading, and pump and dump behavior. FINRA's oversight of its portal and the SEC's crackdown on abusive campaigns in crypto securities show ways that can be used with all types of assets.

Implementation details and failure modes

The real problem is avoiding a liquidity mirage. Volume that is reported can look good even when depth is low and prices are only a little bit different. That risk goes up when floats are small or when insider unlocks are about to happen. Transparent float schedules, minimum depth commitments for market makers during trading windows, and call auctions when imbalance indicators flash are all possible solutions. The second problem is adverse selection. When information is one-sided, spreads get wider or liquidity providers pull out. Granular disclosures, issuer Q&A windows that send news to auctions, and fines for false statements are all possible solutions. The third problem is that people are confused about where the lines are. New rails make it hard to tell the difference between securities, rewards, and customer loyalty programs. Clear labeling and corridor tests for profit rights help keep legal surprises to a minimum. (Glosten and Milgrom 1985; SEC Rule 606; IOSCO 2019 and 2025). Street agrees that everyone can access AMM, but they make sure that the path from the first trade to ongoing liquidity is structured and not random. We don't want to keep people from participating; we just want to put brakes and steering on the car that everyone is already driving by making sure that companies building on the Street Standard have clear and useful tokens from the start.

Street as ethical market design - inclusion without chaos

How Street’s listing standards operationalize safe inclusion

Street sees liquidity as a public good and plans to grow it in a responsible way. The model splits the advisory brand entity from the operating startup and an offshore foundation that gives out tokens that are linked to startup exposure. That three-entity separation keeps the advisory provider from issuing securities, gives equity to a foundation, and lets compliant allow-listed wallets work. Tokens give you tradable exposure and community rewards without giving you equity rights or the right to make a profit claim, which keeps liquidity high and legal risk low. On-chain cap tables and auditable treasuries give information that is always available and can be read by machines. Vesting and float discipline are meant to stop supply shocks, and trading fee-driven distribution gives startups a way to get money that doesn't dilute their ownership and grows as they use it. That mix of entity separation, programmable compliance, clear cap tables, vesting, and incentive alignment is a market design choice that makes it possible for everyone to be included without causing problems.

The platform's listing standards turn general rules into specific gates. Issuers must follow vesting and float schedules, keep on-chain records that support surveillance, and implement allow-listed compliance. Instead of being seen as contractual payouts, discretionary community rewards are framed as loyalty mechanics. This lowers the risk of misclassification while still allowing a lot of people to take part. Because core distribution comes from trading fees instead of just primary issuance, early liquidity helps both market makers and the issuer treasury without causing dilution. The listing book is like a car's throttle and brakes.

What is different and why now is a good time

Two timing forces are important. The first thing that happens is that the cultural shift from speculative issuance to fee and revenue-linked instruments makes thin float hype less appealing and makes transparent economics more valuable. Second, institutional policy has made venue-level tools better since 2010. LULD plans, more detailed routing disclosures, and better surveillance all help to lower the risks that come with retail access. A platform that incorporates those lessons while encouraging participation is more likely to achieve Rawlsian fairness alongside Hayekian discovery. Simply put, a listing framework that includes auctions, float discipline, and risk budgets can make the tent bigger without starting a fire.

Risks and objections - with specific mitigations

A mirage of liquidity. Critics are worried that activity that can be seen hides weakness, especially in micro float assets. Mitigation means that there are predictable supply and clear unlock schedules, minimum quote depth targets for certain market makers during auctions, and automatic call auctions when order imbalance thresholds are reached. Venue rules may require issuers to publish float calendars and make sure that reward distributions match those calendars to avoid cliff events.

Bad selection and lack of information. When insiders or smart investors know more, spreads get bigger and retail investors pay too much. The answer is more detailed, standardized disclosures and ways to get important updates into scheduled auctions. That makes it less likely that retail is always picking up nickels in front of steamrollers.

Limits on what can be shared in private markets. Even standardized forms don't help when histories are short and claims can't be verified. Portals and listing venues need more than just checking forms; they need to be watched and punished for making false statements. Linking discretionary rewards to verified milestones instead of promises makes things even less likely to go wrong.

Uncertainty about the regulatory perimeter. New rails make it hard to classify things. The risk is lower when there is a clear line between equity and tokens, when contractual profit rights are carefully avoided, and when compliance follows existing order routing and investor protection rules. Putting tax, accounting, and legal opinions in the disclosure stack helps investors learn more and shows that you mean business.

Integrity of operations. Always-on venues make it easier for attackers to get in. Platforms should promise to report incidents to the public, have third-party audits of matching engines and smart contracts, and have kill switch protocols that work with circuit breaker thresholds. Rule changes and how to handle exceptions can be overseen by independent governance committees.

Adoption playbook - practical steps for both issuers and investors

For issuers

Get the data room ready for a time of liquidity. That means cap tables, vesting schedules, and treasury flows that machines can read. Put out a float calendar for at least 24 months and stick to it. Think of the calendar as part of your capital costs. Uncertainty will affect prices in the market.

Pick access corridors and put labels on them. If you use a tokenized exposure instrument, make sure to show the rights and non-rights on the first screen. If you use Reg A or Reg CF, make sure that your disclosure templates have the same first screen so that investors see the same labels on all channels.

Use auctions and fee budgets to add depth. You can focus liquidity instead of spreading it out by having opening auctions on the first day and periodic call auctions around milestones. Set aside money for trading fee rebates or maker incentives in the first 90 days to get people to trade on both sides of the market. Keep an eye on spreads and depth against targets and make those KPIs public.

Don't base rewards on feelings; base them on real milestones. If you want to give community rewards, make sure they are based on public, binary events like shipping a feature, signing a customer with real revenue, or reaching a cost goal. That keeps you from promising cash flows and lowers the chance of making a mistake in classification.

If you want to be included without causing trouble, follow Street's listing standards. The three-entity architecture, allow-listed compliance, on-chain records, and float discipline lower legal and market risk while bringing in more investors. Don't think of trading fee-driven distribution as a replacement for equity finance; think of it as a way to add to it. It helps you reach more people without losing too much.

For people who want to invest

Always read the first screen. Check the float path, the unlock calendar, and what you own and don't own. Like bond investors do with call schedules, treat float calendars the same way. They are very important for expected returns.

Ask your broker for clear information on demand routing. Request Rule 606 reports and pick a routing profile that fits your needs. Long-term investors often do better with price and size priority than with small price changes.

Put your money at risk in size positions. Limit your exposure to illiquid or high-variance instruments to a small part of your risk budget until you've seen them trade through at least one volatility event. During auctions, rebalance to cut down on slippage. Plan for SEC LULD.

Keep an eye on the quality of the market. Keep an eye on spreads in basis points, top-of-book depth in dollars, and the effect on price for every $10,000 traded. If those get worse, raise your required return or step back. The Amihud logic also works for your portfolio.

Spread your investments across different rails. Reg CF, Reg A, and tokenized exposure channels all teach different things and have different risks. By using different routes, you lower the risk of a single point of failure and make your own discovery process better.

Conclusion - liquidity should be a public good, not a privilege

Liquidity lowers the cost of capital and spreads risk in ways that both the market and society benefit from. Ethical market design really cares about that public good. It rejects paternal exclusion when guardrails can provide equitable access, yet simultaneously dismisses nihilism regarding risk. Rawls talks about fair chances and limits that clearly help the people who are doing the worst. Hayek reminds us that rules that let local knowledge come to light lead to discovery. The synthesis is a framework that lets more people take part while limiting harm that can be predicted. The design playbook is not just a theory. We know how to set up auctions, set volatility bands, and make disclosures the same for everyone. We know how to publish routing and deal with problems. We can also apply those lessons to new rails, where startup exposure can be traded without turning every token into an equity lookalike. When you think of liquidity as a public good, you think of markets that learn in public instead of behind a velvet rope, inclusion with rules, and discovery with brakes.