Liquidity and Depth

Scope. This article explains what liquidity actually consists of, how order size interacts with it, and why the usual proxies mislead. MarketClue publishes no liquidity score, labels no security as liquid or illiquid, and sets no threshold for any measure. It accepts, routes and executes nothing. Prices and quantities are small non-canonical illustrative figures describing no actual security. United States market structure, checked 17 August 2026.

Tightness — how narrow the spread is, which Bid, Ask and the Spread covers.

Depth — how much quantity is available near the current price.

Resiliency — how quickly the book refills after quantity has been consumed.

A market can be tight and shallow: a narrow spread on very little size. That combination looks excellent on a quote screen and behaves badly for anything but the smallest order.

What depth costs as size grows

Taking a book with quantity spread across eight price levels and sending progressively larger buy orders into it. The best available price is $40.02 throughout. (The illustrative book: 200 at $40.02, 300 at $40.05, 200 at $40.11, 300 at $40.20, 500 at $40.35, 500 at $40.60, 1,000 at $41.00 and 2,000 at $41.75 — the first four levels are the ones Market Orders walked.)

Worked example — the cost is not proportional to size, and the flat start is the trap. The first 200 shares cost nothing above the best price. Twenty-five times that size costs 2.487%. Between those points the cost accelerates: doubling from 1,000 to 2,000 shares more than triples the impact, from 0.202% to 0.670%. The flat region at the start is what makes this dangerous — a reader whose experience consists of small orders has observed no impact at all, and has therefore learned that impact does not exist. The lesson generalises past this table: what a market costs cannot be inferred from what it cost at a size you have never exceeded. MarketClue publishes no threshold for an order size that is too large and characterises no book as deep or shallow. Figures are illustrative and describe no actual security.

The equivalence worth remembering

Halve the quantity at every level of that book, and 1,000 shares now costs 0.670% instead of 0.202%.

That is exactly what 2,000 shares cost in the deeper book. Halving the depth is equivalent to doubling the order.

Why volume is not depth

Trading volume is the most widely used liquidity proxy and it measures something else.

Volume is a record of what has already happened. Depth is a statement about what is available now. A security can trade heavily all day in small increments and still show very little quantity at any single moment — and The Order Book and How Matching Works adds the further complication that displayed depth is revocable, so even the current figure is a description of intentions rather than commitments.

Volume is also endogenous to conditions. Heavy volume often accompanies exactly the circumstances in which depth thins, so the proxy and the property can diverge at the moment the distinction matters.

The pattern across all three dimensions

Tightness, depth and resiliency deteriorate together, and they deteriorate under the same conditions.

Spreads widen, quantity is withdrawn and refill slows in the same episodes — because all three are supplied by participants making the same judgement about whether to stand in front of a moving price. They are not three independent safeguards; they are three expressions of one willingness.

The consequence, stated without any recommendation attached: liquidity is a property of the moment rather than of the security, and it is most abundant when it is least needed. This is the same asymmetry the pillar has now met four times — in adverse selection, in the ageing of resting orders, in revocable depth, and here — and it is one fact wearing different mechanical clothing each time.