Liquidity

A property of a market at a moment, and not a single number. Three dimensions are conventionally separated. Tightness is the cost of dealing a small size immediately, which the spread reports. Depth is how much quantity rests at and near the best prices, which decides what a larger order costs. Resilience is how quickly the book refills after that order has taken the resting interest away. A market can be tight and shallow at the same time, which is the case ordinary spread comparisons miss completely.

It follows the clock, the calendar and the news. The overlap of the main trading centres is the deepest part of a foreign exchange day and the hours between them the thinnest, public holidays in a currency's home market drain the interest quoting it, and index roll dates and month end concentrate flow. In the seconds around a scheduled release, providers widen their quotes or step back entirely, so the same instrument is a different market before and after a figure it barely mentions. The number of independent participants quoting is what makes the recovery quick rather than slow.

The trip is judging it from the top of the book, which is the part that disappears first. A displayed spread can stay narrow while the size behind it has gone, so the true cost of dealing size is the average price actually obtained rather than the quote on the screen, and the difference between them is slippage. The deeper point, and one not disputed among practitioners, is that liquidity is asymmetric under stress: it thins precisely when the largest number of positions most need to be closed, so an average measured over calm periods understates the cost of the episodes that actually matter.