Definition
Market liquidity depends on available counterparties and the prices and quantities they offer. It is specific to a venue, pair, time, and trade size. An asset can be liquid in one market but difficult to trade in another.
How It Works
A narrow spread reduces the gap between immediate buying and selling prices. Depth shows how much can trade near those prices, while resilience describes how liquidity recovers after trading. In a pool-based exchange, available reserves and the pricing design influence swap capacity. Large trading volume can accompany strong liquidity, but volume alone does not measure it.
Key Considerations
For example, a market suitable for a small purchase may move sharply under a large sale. Liquidity can disappear during stress as participants cancel orders or withdraw capital. Assess executable depth and transaction costs rather than assuming that a popular asset or high headline volume guarantees an easy exit.