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Liquidity: read beyond the headline price

Understand spreads and depth through a worked order-book example, then check what the numbers do and do not tell you.

Concepts · Worked example · Self-check

Bitcoin and Ethereum tokens

Three concepts to separate

The bid is a buyer’s offered price; the ask is a seller’s offered price. Their difference is the quoted spread. Depth describes the quantities available at successive prices. A tight spread and substantial depth are different properties.

A quotation is a snapshot. It does not reserve quantity for a future order. Compare the size of the intended order with the quantities shown, and distinguish displayed liquidity from a completed trade.

Reference: CME Group · How Traders Measure Liquidity

Work through a hypothetical order

Assume a static order book with the following sell offers. All units are fictional; fees, cancellations and competing orders are excluded.

Available sell offers
PriceQuantity
100.002
100.503
101.005

Buying seven units consumes 2 at 100.00, 3 at 100.50 and 2 at 101.00. Total cost is 703.50; average price is 100.50. The best displayed offer of 100.00 was available for only two units.

Relative to the initial best offer, this example costs 3.50 more in total, or 0.50 per unit. This comparison illustrates depth; it is not a forecast of any actual market.

Ask better questions

  • Which venue, pair and timestamp does the observation refer to?
  • How much quantity is available near the quoted price, not just at the first level?
  • Would the conclusion change for a smaller or larger order?
  • Are the observations from normal activity or an unusual event?

A candidate can use the example to explain why a single number does not describe an entire market. A potential partner can use the same questions to write a more precise market brief.

Common misunderstandings

Does a narrow spread mean every order will trade cheaply?

No. In the example, a larger order reaches additional price levels. The spread alone does not describe the available quantity.

Is visible volume a promise?

No. This exercise freezes the book for clarity. Actual orders can be cancelled, replaced or filled before another order reaches them.

Check your understanding

Using the same example, what is the average price for a purchase of five units? Work it out before opening the answer.

Reveal the calculation

(2 × 100.00 + 3 × 100.50) ÷ 5 = 100.30. The quantity required determines how many price levels are used.

Educational material with fictional examples, not live market data or personalised investment advice. Examples describe concepts and do not claim specific Aldermere systems or performance.

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