What is liquidity

Liquidity is the ability of funds or assets in the market to be quickly converted into actual trades. In financial markets, liquidity is often used to describe the level of trading activity and transaction costs for a particular asset or market.

An order book is a list that records all buy and sell orders in the market, displaying the current supply and demand for a trading asset. The order book is typically arranged based on price, from the lowest to the highest, and shows the quantity of buy orders and sell orders at each price level.

Through the order book, the following information about liquidity can be obtained:

1. Market depth: The order book shows the quantity and prices of buy orders and sell orders. Greater depth indicates higher market liquidity, as there are more buy and sell orders available for execution.
2. Bid-Ask spread: The difference between the highest buy order price and the lowest sell order price in the order book is called the spread. A smaller spread indicates higher market liquidity, as the buy and sell prices are closer together, making trading easier.
3. Quick execution capability: Markets with high liquidity typically have a large number of buy and sell orders, allowing assets to be converted into cash more quickly. This means that investors can buy or sell assets quickly without significantly impacting the price.

The order book is important for traders as it provides real-time information about the supply and demand in the market. Traders can use the information from the order book to assess the level of market liquidity and potential price movements. When there are more buy orders in the order book, indicating higher liquidity, prices may rise. Conversely, when there are more sell orders, indicating lower liquidity, prices may fall.

In summary, liquidity refers to the ability of funds or assets in the market to be quickly converted into actual trades. The order book, as an important indicator of market liquidity, provides real-time insight into the supply and demand situation in the market.