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Markets & Instruments

How Liquidity Differs Between Instruments

Liquidity is how much of an instrument can be bought or sold before the price has to move, and it shows in the spread and in the depth, the sizes waiting at each price. This paper shows what depth is, how the Depth of Market window draws the book, what the same ten-lot order pays in a deep book and in a thin one at a real price, and where the Spread column and the book are read on a platform. After reading it you can tell a deep row from a thin one at a given hour, and say what a thin book adds to the cost of an order.

Difficulty
Advanced
Reading time
5 min
Pages
8
Reviewed by
Saman Rahbar

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Liquidity, in five lines

Liquidity is how much of an instrument can be bought or sold before the price has to move. It shows in two places: the spread, which is the gap between the buying and the selling price, and the depth, the sizes waiting at each price behind the quote. The major currency pairs, gold and the big indices are deep in their hours. A small share, a small coin, a cross pair at three in the morning, and any row at midnight, are thin. What thinness costs is a wider spread and a fill that walks up the ladder. Liquidity belongs to the instrument at that hour, not to the instrument alone.

Deep water and shallow

Picture the same boat on deep water and on shallow. On deep water the boat passes and the surface hardly moves. On shallow water the same boat drags the bottom and stirs the mud. The boat is your order; the water is everybody else's orders waiting at each price; depth is how many of them there are. The same size of order is a ripple in one market and a wave in another, and the wave is the price moving because of you.

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