Liquidity is one of the most used and least examined words in markets. It gets treated as a synonym for volume, which is convenient and wrong. A more useful definition is this: liquidity is the cost of changing your mind. If you can reverse a position quickly, in size, without moving the price much, the asset is liquid. If you cannot, it is not, whatever the volume figure says.
Volume is activity, depth is capacity
Volume counts what has already traded. Depth describes what is currently waiting to trade — the orders sitting in the book at each price level, ready to absorb an incoming order.
These come apart more often than you would expect. An asset can post a large daily volume that consists almost entirely of small trades ricocheting between the same participants, while the book behind it is thin enough that a single meaningful order would clear several price levels. Volume is a record; depth is a capability. Only one of them tells you what will happen when you press the button.
Where the cost actually shows up
Three components make up the real cost of a trade, and only one of them is the fee.
The first is the spread — the gap between the best price to buy and the best price to sell. Cross it and you have paid something before the position has done anything.
The second is impact. If your order is larger than what sits at the best price, the remainder fills at worse levels. The average price you achieve is not the price you saw quoted, and the difference grows faster than linearly with size.
The third is fragmentation. The same asset trades in many places at once, and depth in one venue is not available to an order routed to another. An aggregate figure adds up liquidity that no single order can actually reach.
The property that matters most
Liquidity is not a constant. It is supplied by participants who are choosing, moment to moment, how much risk to carry — and they withdraw when uncertainty rises. This is the uncomfortable part: depth thins precisely when volatility spikes, which is precisely when people most want to trade.
Any assessment of liquidity taken on a calm day is therefore an optimistic one. The relevant question is not how deep the book is now, but how deep it was the last time the market moved violently. That is a harder number to find and a more honest one.
Reading it in practice
A few habits help. Compare depth rather than volume when comparing assets. Look at what a realistic order would cost you rather than at the headline spread. Treat concentration on a single venue as a risk in itself, because it is. And be sceptical of any liquidity claim that has not been tested by a bad day.
Our glossary covers liquidity and the order book in more detail, and the markets page carries live volume figures — read alongside the caveats above rather than instead of them. This is information, not advice.