The aim of this study is to gather insights into market efficiency and mechanisms that work in the financial markets. It provides a framework with an emphasis on liquidity and the failure of arbitrage that deepens our understanding of various financial crises. Described mechanisms are particularly relevant for the last financial crises - including 2007-2009, LTCM, and dot-com bubble. In the first chapter the concept of efficient markets is introduced. In the second chapter it is challenged from the point of view of noise trader theory and limits of arbitrage. The third chapter deals with market microstructure and liquidity. Last chapter shows importance and adverse effects of externalities, particularly of those causing liquidity spirals.