Markets · 6 pages · 12 min
Why a liquid market has a tight one
In a liquid market many competing quotes and easy exits keep the bid-ask gap narrow.
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From the opening
A liquid market lets size trade quickly without moving the price much, and a tight spread is the visible sign that immediacy is cheap. Competing quotes and a credible chance to exit keep the gap between bid and ask narrow. The opening covers competition narrows the quotes, easy exits shrink inventory risk, and depth must sit behind the gap.
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Inside
- Competition narrows the quotes
- Easy exits shrink inventory risk
- Depth must sit behind the gap
- Stress can widen a calm book
- Where the idea stops applying
- A distinction worth keeping
Sources
- Liquidity and the bid-ask spread
- Market depth and resiliency