Liquidity is a significant trading indicator as it provides an insight into the price efficiency of a market. Defined as the degree to which an asset can be bought or sold, liquidity can impact the price level rather than the fundamentals of an asset. Using the APEX:E3 platform, you can identify and analyse where discrepancies between price and intrinsic value occur, informing trading strategies.
Cash such as USD, is considered to be the most liquid asset as it provides a widely accepted medium of exchange which can easily be converted into other assets. Real estate and art are asset classes considered to be relatively illiquid. This is because it’s intrinsic value may be subjective, there may be a lack of ready and willing buyers/sellers of the asset, and there is a transaction-time variable.
Where does liquidity come from?
Liquidity is derived from the depth of supply and demand in a specific asset. Each US Dollar for example is identical and there are billions of them — the market is deep through its supply. There are also billions of people who are willing to use dollars for an array of activities from spending to saving — high demand. In real estate for example, there is only one of every type of property as it occupies a specific geographic space. This makes it hard to value as there is not a transparent price if it is transacted infrequently and when transacted, the price is unstable.
Other financial assets such as equities and treasury bonds all have different liquidities. Public Equity markets are characterised by higher market liquidity, as they historically have high volumes of trades.
A market spread is the difference between the price at which a seller is willing to sell and the price a buyer is willing to buy. If an exchange sees a high volume of trades of a particular asset, the price a buyer offers (bid) and the price a seller is willing to accept (ask) will be tight i.e. close. This is because there are numerous market actors on both sides of the transaction. A tight spread is one of the main characteristics of a liquid market. If the spread, i.e. difference between buyer bid and seller ask grows, the market may be becoming more illiquid.
Assets which attract interest from traders and investors trade more frequently on exchanges. This means the markets they trade in have higher submission of orders resulting in tighter spreads. This ultimately yields relatively higher daily trading volumes defining their greater liquidity.
The APEX:E3 Edge
APEX:E3, has aggregated level 2/3 depth data from multiple Digital Asset exchanges, which is used to analyse over five thousand orderbooks in real-time. Our platform allows you to identify liquidity across all exchanges, for all Digital Assets, in one place. This gives new, informative and valuable insights to trade around.
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Credit: George Lewin-Smith