Important Information

You are visiting the international Vantage Markets website, distinct from the website operated by Vantage Global Prime LLP
( www.vantagemarkets.co.uk ) which is regulated by the Financial Conduct Authority ("FCA").

This website is managed by Vantage Markets' international entities, and it's important to emphasise that they are not subject to regulation by the FCA in the UK. Therefore, you must understand that you will not have the FCA’s protection when investing through this website – for example:

  • You will not be guaranteed Negative Balance Protection
  • You will not be protected by FCA’s leverage restrictions
  • You will not have the right to settle disputes via the Financial Ombudsman Service (FOS)
  • You will not be protected by Financial Services Compensation Scheme (FSCS)
  • Any monies deposited will not be afforded the protection required under the FCA Client Assets Sourcebook. The level of protection for your funds will be determined by the regulations of the relevant local regulator.

If you would like to proceed and visit this website, you acknowledge and confirm the following:

  • 1.The website is owned by Vantage Markets' international entities and not by Vantage Global Prime LLP, which is regulated by the FCA.
  • 2.Vantage Global Limited, or any of the Vantage Markets international entities, are neither based in the UK nor licensed by the FCA.
  • 3.You are accessing the website at your own initiative and have not been solicited by Vantage Global Limited in any way.
  • 4.Investing through this website does not grant you the protections provided by the FCA.
  • 5.Should you choose to invest through this website or with any of the international Vantage Markets entities, you will be subject to the rules and regulations of the relevant international regulatory authorities, not the FCA.

Vantage wants to make it clear that we are duly licensed and authorised to offer the services and financial derivative products listed on our website. Individuals accessing this website and registering a trading account do so entirely of their own volition and without prior solicitation.

By confirming your decision to proceed with entering the website, you hereby affirm that this decision was solely initiated by you, and no solicitation has been made by any Vantage entity.

I confirm my intention to proceed and enter this website Please direct me to the website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom

By providing your email and proceeding to create an account on this website, you acknowledge that you will be opening an account with Vantage Global Limited, regulated by the Vanuatu Financial Services Commission (VFSC), and not the UK Financial Conduct Authority (FCA).

    Please tick all to proceed

  • Please tick the checkbox to proceed
  • Please tick the checkbox to proceed
Proceed Please direct me to website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom.

×

Celebrating 15 Years of Excellence

Find Out More >
Celebrating 15 Years of Excellence
View More
SEARCH
  • All
    Trading
    Platforms
    Academy
    Analysis
    Promotions
    About
  • Search
Keywords
  • Forex Trading
  • Vantage Rewards
  • Trading Fees
  • facebook
  • instagram
  • twitter
  • linkedin
  • youtube
  • tiktok
  • spotify
Mastering Market Liquidity: What Is It And How To Make Use Of It

TABLE OF CONTENTS

Mastering Market Liquidity: What Is It And How To Make Use Of It

Mastering Market Liquidity: What Is It And How To Make Use Of It

Vantage Updated Updated Tue, 2023 March 21 08:39

The term ‘liquidity’ is constantly being tossed around in the finance industry, but what exactly does it mean? Today, we will explore the concept of liquidity, its importance in trading and investing, and some of the factors that can influence market liquidity. 

Let’s dive into the world of liquidity and explore its significance in the financial ecosystem.

Key Points

  • Liquidity in financial markets refers to the ease with which assets can be bought or sold without causing significant price changes; stocks are an example of liquid assets due to their ability to be quickly traded, whereas bonds are less liquid due to longer holding periods.
  • Market liquidity ensures efficient trading, characterised by rapid order execution, reduced transaction costs, minimal price impact from large trades, and improved accuracy of asset pricing reflecting collective market knowledge.
  • In trading Contracts for Difference (CFDs), liquidity is essential as it affects the speed of execution, pricing accuracy, and the tightness of spreads, all contributing to the overall trading experience and potential success.

What is Liquidity?

Liquidity can be considered at both the asset level (how easily an individual asset can be bought or sold) and the market level (how easily participants can trade within the entire market).

Asset liquidity refers to the ease with which an asset can be bought or sold in the market without significantly affecting its price. A highly liquid asset can be quickly converted to cash with minimal price impact, while an illiquid asset may require more time and effort to sell or may need to be sold at a discount to its fair market value [1]

A typical example of a liquid asset class would be stocks that can be traded and sold, while an asset like bonds is less liquid given that they come with holding periods. 

What Is Market Liquidity?

Market liquidity refers to the ability of a market to facilitate the buying and selling of assets with ease and without causing significant price fluctuations. A market is considered highly liquid when there is a large volume of trading activity, allowing participants to execute transactions quickly and easily at stable prices [2].

Here are some advantages when trading highly liquid markets [3]:

  • Faster execution: In liquid markets, orders are more likely to be filled quickly, which is particularly important for traders who need to react to market movements rapidly.
  • Lower transaction costs: With tight bid-ask spreads, the cost of trading is reduced, making it more attractive for participants to enter and exit positions.
  • Less price impact: The ability to trade large volumes without causing significant price fluctuations reduces the risk of price manipulation and increases market efficiency.
  • Improved price discovery: High liquidity enables more accurate pricing, as it reflects the combined knowledge and expectations of a larger number of market participants.

Examples of Liquid and Illiquid Markets

The foreign exchange market is an excellent example to showcase a highly liquid market. The daily traded volume for forex market is in the trillions, and major currency pairs, such as EURUSD, have high liquidity and tight bid-ask spreads [4]

A close runner up to the forex markets would be the stock market. Major stock exchanges are considered highly liquid markets, such as the New York Stock Exchange (NYSE), or the NASDAQ. The shares of such large-cap companies can be easily bought and sold without significant impact on prices [5].

On the other end of the spectrum, illiquid markets can include the real estate market as the buying and selling of property can be a lengthy and time-consuming process. From property appraisals, to inspections, negotiations, and even financing, the whole process may take weeks to months [6].

Lastly, another example of illiquid markets is the penny stock market. Penny stocks often have lower trading volume and fewer market participants, resulting in higher bid-ask prices and lesser liquidity.

Does Liquidity Matter When Trading CFDs?

Yes, it does, CFD’s are still impacted by the liquidity of the underlying market. 

High liquidity in CFD trading allows for higher price accuracy, execution speed, tighter spreads, and reduced volatility. Here at Vantage when you open a Vantage PRO ECN Account, traders can have access to institutional grade liquidity from the world’s leading providers at their fingertips. 

Interested to access deep liquidity and true ECN institutional spreads? Open a Live PRO ECN account here.

Conclusion

By knowing what liquidity is and its implications, traders and investors alike can execute more informed decisions when selecting various asset classes. 

As the global economy and financial markets continue to evolve, market liquidity will remain a cornerstone of well-functioning and vibrant markets, fostering growth and opportunities for all market participants.Looking to take a ‘dip’ into highly liquid markets? See what markets Vantage offers here or sign up for a demo account here.

References

  1. “How a liquidity asset can help your cash flow at short notice – Agicap” https://agicap.com/en/article/liquidity-asset/ Accessed 20 Mar 2023
  2. “Understanding Liquidity and How to Measure It – Investopedia” https://www.investopedia.com/terms/l/liquidity.asp Accessed 20 Mar 2023
  3. “Liquid Market: Definition, Benefits in Trading, and Examples – Investopedia” https://www.investopedia.com/terms/l/liquidmarket.asp Accessed 20 Mar 2023
  4. “Liquid market definition – Forex.com” https://www.forex.com/en-uk/glossary/liquid-market/ Accessed 20 Mar 2023
  5. “What Investments Are Considered Liquid Assets? – Investopedia” https://www.investopedia.com/ask/answers/032715/what-items-are-considered-liquid-assets.asp Accessed 20 Mar 2023
  6. “Illiquid – Corporate Finance Institute” https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/illiquid/ Accessed 20 Mar 2023
  • vantage academy open account

    Open Trading Account

    Discover the endless trading possibilities with our cutting-edge platform, designed to empower both beginners and seasoned traders alike.

  • vantage academy app

    Download Vantage App

    Trade on the go with the Vantage All-In-One Trading App, where smooth execution and market access come together in the palm of your hand.

  • vantage academy start trading

    Start Trading

    Are you an existing user? Login to your account to start trading 1,000+ products including forex, indices, gold, shares and more.