Posted inFinTech

Lecture 27 Introduction to Volume Slippage and Liquidity


In this kind of market trading happens very smoothly no matter what size you are trading, and transactions are filled in very short periods of time. Better yet, trade price is very stable as the order book is fat and there will always be someone willing to make you a market. So as you can see the work of that middle man is very important because he is providing “liquidity” .

Liquidity vs Volume

Volume and open interest both describe the liquidity and activity of options and futures contracts. Excluding accounts receivable, as well as inventories and other current assets, it defines liquid assets strictly as cash or cash equivalents. There are a number of ratios that measure accounting liquidity, which differ in how strictly they define “liquid assets.” Analysts and investors use these to identify companies with strong liquidity. In after hours trading when most traders are back at home, the market slows and each trade affects the price more and more.

Conversely, capacity is measured in metric units, such as millilitres, litres, gallons, pounds, etc. Volume refers to the number of trades completed each day and is an important measure of strength and interest in a particular trade. Jiwon Ma is a fact checker and research analyst with a background in cybersecurity, international security, and technology and privacy policies. Before joining Dotdash, she consulted for a global financial institution on cybersecurity policies and conducted research as a Research Analyst at the Belfer Center for Science and International Affairs. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.

Key Differences Between Volume and Capacity

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Some stocks are hard to borrow/short, and may experience one sided liquidity.

  • Enthusiastic about Innovation, Digital Assets, Bitcoin, Tokenization.
  • Stocks with a high volume are very liquid, not to mention they have lower spreads between the bid and ask prices.
  • Volume and open interest are two key technical metrics that describe the liquidity and activity of options and futures contracts.
  • Sometimes there can be large block transactions occuring in a single instrument.
  • This blog gives an overview of the two and how they impact options pricing and liquidity.

Something is described as “liquid” if it’s it can be bought or sold easily without substantially moving its price up or down. The “ease” factor is based on the time required to execute the transaction. The term ‘capacity’ is understood as the ability of the hollow object to hold substance, i.e.,. It is a measure, that ascertains the amount of space available in a container, that can be filled with matter. In other words, the total amount of matter that can be contained in the object is the capacity of the container. In our day to day life, we came across a number of three-dimensional (3-D) objects, which has a certain volume.

The designated market maker will also attempt to maintain a tight bid/ask spread so that the price of the ETF closely approximates the net asset value per unit throughout the trading day. Cory is an expert on stock, forex and futures price action trading strategies. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. The price is based purely on what crypto exchange you’re on and what this specific “population” of traders is willing to pay.

For example, buying ten call options is an opening transaction. For example, 10,000 contracts can trade on the day with an open interest of only 5,000, because contracts can trade hands multiple times without creating a new contract. Options What is Crypto Liquidity traders must consider both volume and open interest because the two data points tell different stories. Because the more buy orders (“bids“) and sell orders (‘asks“) placed for a cryptocurrency, the closer the bid and ask prices are.

One Reply to “Understand the Basic Difference Between Liquidity and Volume”

The term “liquidity” refers to the level of rapidity or ease with which a cryptocurrency can be either bought or sold in an exchange for its market price. Without liquidity, orders can’t be matched between buyers and sellers, and a crypto exchange would go out of business. The potential signal towards the end of a prevailing market trend creates an alarming atmosphere in the market, leading investors to opt in or out of their holding positions. It, in turn, induces market volatility and increases the market trade volume.

Trader A decides to buy a contract while Trader B decides to sell a contract. Open interest is updated daily and is typically displayed beside volume on an options chain. The difference in prices comes down to the amount of liquidity available on each “island” . When there is plenty of liquidity, the price of a cryptocurrency won’t be overly affected by a single order.

Examples of Dollar Volume Liquidity in Several Different Stocks

Markets for real estate are usually far less liquid than stock markets. The liquidity of markets for other assets, such as derivatives, contracts, currencies, or commodities, often depends on their size, and how many open exchanges exist for them to be traded on. Breakouts can push volume times the average daily volume, especially for low volume stocks. Momentum strategies work best in low volume because each tick is worth more than in a high volume stock.

Liquidity vs Volume

The liquidity of a security or a commodity is easier to determine along with its implications. In complete opposition to the aforementioned fact are securities with a lower trade volume. A lower trade volume indicates a low overall market interest in that particular security or commodity.

What Is Dollar Volume Liquidity?

For the past several sessions I have been harping consistently about liquidity in the markets. More exactly about the lack of liquidity we are experiencing right now so I want to use this opportunity to dispel some misconceptions about what liquidity really is. The most important takeaway from this post is that liquidity is not volume.

It is often referred to as the “Real” or “Actual” volume of the system. Suppose there is a tank filled with water, so the volume is the space occupied by the tank and the water, inside the tank, while its capacity is the quantity of water needed to fill the tank. Volume is always measured in cubic units, such as cubic centimetre, cubic meter.

Liquidity and Volume are the two different concepts widely misunderstood by the traders community. High Volume typically represents higher number of executed orders or high trading transactions, however high liquidity represents the order book is stuffed with thick limit orders at Bid and Ask prices levels. More closer the liquidity , lesser the market impact cost and higher the market efficiency. If you trade non-liquid options, you run the risk of not being able to close or adjust the position because the market is simply too small. Even if you can trade the contract, it may be priced inefficiently. It’s in your best interest to only trade securities with very liquid options.

Understanding Dollar Volume Liquidity

The day after, five contracts were closed, 10 were opened, and open interest increased by five to 15. The quick ratio is a calculation that measures a company’s ability to meet its short-term obligations with its most liquid assets. For example, if a person wants a $1,000 refrigerator, cash is the asset that can most easily be used to obtain it. If that person has no cash but a rare book collection that has been appraised at $1,000, they are unlikely to find someone willing to trade them the refrigerator for their collection.


With a limit order, you do not have to worry about buying or selling the ETF at a price you were not expecting. Well as you’ve probably gathered by now, volatility is a direct product of a) the volume traded b) the liquidity available and both of these factors come into play when it’s NFP time. Volume in the forex market is opaque because forex is decentralised so there is no central exchange reporting volume figures and very few brokers share their volume data publicly. Slava Loza Forex Trader & Analyst It is also one of the least volatile markets in the world, with traders being forced to use leverage to magnify natural volatility to tradeable levels.

Marketable securities such as stocks and bonds listed on exchanges are often very liquid and can be sold quickly via a broker. Gold coins and certain collectibles may also be readily sold for cash. If markets are not liquid, it becomes difficult to sell or convert assets or securities into cash.

Equity Investments

The stocks are getting traded more frequently and more rapidly than the ones with lower volume. Hence, a high trade volume is generally an indication of a high liquidity level for a particular security or commodity in the market. The foreign exchange market is the largest and most liquid financial market in the world, with razor sharp spreads and daily trading volumes in the trillions of dollars. Crypto exchanges with a higher trade volume indicate a greater number of buyers and sellers on their trading platform. Cryptocurrencies are getting traded in larger quantities and more frequently than exchanges with lower trading volume.

Why is liquidity important?

As you can see, the large order for stock X was not immediately filled, and the demand pushed the market price against the original order, resulting in a fill price worse than expected. In general, the larger the order, the more slippage will be experienced by a trade. This is due to a variety of factors including people wanting to update their positions based on price changes and new information that emerged before trading started. Since there was a ton of time and possibly news overnight while the market could not react, trading right after the open can be a bit volatile as pricing adjusts. For pricing data, QuantRocket’s US Stock dataset provides the last traded prices at a minute resolution. While we do not offer minutely volume-weighted price, daily volume-weighted price can be approximated from the minute bars.

With last traded data, only the final observation from that bar is reported. It is important to know if the data is averaged, volume averaged, or simply last traded. BetaPro ETFs use a corporate class structure and are designed to provide market-savvy investors with leveraged, inverse and inverse leveraged exposure to various indices or commodities on a daily basis. Investors need to differentiate between volume vs liquidity, as both terms are widely used in stock trading. Volume and liquidity are correlated; however, the two terms are also very different from each other. On the other hand, a $200 stock that does one million shares means there is $200 million of stock changing hands each day.