Illiquid

A description of depth, not of direction or of excitement. In an illiquid instrument few participants are willing to deal close to the current price, so the quantity available at the top of the book is small and the next price level is some distance away. The condition is a property of a market at a moment rather than a permanent label: the same instrument is deep during its main session and thin an hour after it closes.

It is inferred rather than measured directly, from the width of the bid to ask spread, the quantity resting at each level of the book, the size of the price move a given order causes, and the time between transactions. None of those is decisive alone and there is no threshold that separates liquid from illiquid, which is why desks describe an instrument as thinner or deeper than another rather than assigning it to a category. Turnover is the weakest of the four measures, because a market can print heavy volume while offering almost no depth at any single price.

Two confusions are common. The first is between illiquidity and a quiet chart: liquidity is often at its worst precisely when a market is moving fastest, because participants withdraw quotes around a scheduled release and the spread widens as the price runs. The second is between the spread quoted and the cost incurred. A quote applies to a stated quantity, so an order larger than that quantity is filled across several levels and its average price is worse than the one displayed, an effect that grows with size and is invisible on a chart.