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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Liquidity is defined as the ability to trade large size quickly at a low cost. It is one of the most important characteristics of a market. A liquid market allows traders to implement their strategies cheaply, normally with a limited bid/ask spread. A liquid market is characterized by high volume. It is generally less volatile than an illiquid market.
Usually, you can refer to three dimensions of liquidity - time, size and cost:
• “Immediacy” refers to how quickly you can execute a trade of a given size at a given cost.
• Width refers to the cost of executing a trade of a given size, including commissions.
• Depth refers to the size of a trade that can be executed at a given cost. Width and depth are very strictly related.
A liquid market is a market where you can trade large size quickly at low cost.
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