Liquidity, spreads and depth

Liquidity is the ability to trade size quickly without moving the price much. It is not a single number, and it is not constant. It changes by market, by session and by the minute.

Three dimensions of liquidity

• Tightness: how narrow the spread is. A tight spread means a low cost to cross.
• Depth: how much size rests near the best prices. Deep books absorb larger orders.
• Resilience: how quickly the book refills after a large trade takes liquidity away.

When liquidity changes

• By session: US index futures are typically most liquid during New York hours and thinner overnight.
• Around news: liquidity providers often pull orders just before major releases, so spreads widen and depth thins at exactly the moment prices move.
• Around the forex daily rollover at 5pm New York time, spreads commonly widen for a period.
• Near contract expiry, liquidity migrates from the expiring futures contract to the next one.

Why it matters to a strategy

A backtest usually assumes it can trade at a clean price. Real fills depend on the liquidity available at that moment. A strategy that trades around news or in thin sessions faces a very different cost structure from one that trades in the heart of the busiest session, even if both look identical on a chart.

Educational content only. Not financial advice.