Market basics
Liquidity and depth: why the same order costs different amounts
Two coins can show the same chart, the same spread and the same daily volume, and the identical order can cost you nothing on one and over a percent on the other. The difference is in the book, where nobody looks.
Liquidity is how much you can trade without moving the price
A market is liquid for a given size if you can trade that size without the price moving much against you. Notice that liquidity is not a property of a coin on its own - it is a property of a coin, a size and a moment. A market can be deep enough for a thousand dollars and not for a hundred thousand.
The measurable version is depth: how much quantity is resting in the book within some distance of the mid price. That is the number that decides what your order costs, and it is the number no chart shows.
The same order, two books
Two coins both quoted at 1.0000. You want to buy 50,000 units of each. The only difference is what is resting above the ask.
level 1 60,000 units at 1.0000 your 50,000 units all fill at 1.0000 average fill 1.0000 slippage 0.00%
level 1 5,000 units at 1.0000 = 5,000.00
level 2 10,000 units at 1.0050 = 10,050.00
level 3 35,000 units at 1.0200 = 35,700.00
---------
total 50,000 units 50,750.00
average fill 50,750 / 50,000 = 1.0150
versus the quote 1.0000
slippage 0.0150 / 1.0000 = 1.50%Same screen price, same order, and a cost difference of 1.50% of the position. For comparison, the entire round-trip fee in the fees lesson was 0.10%. Depth can cost you an order of magnitude more than fees do, and it is never itemised.
Worse, the exit is a second helping of the same problem. If selling 50,000 units back costs a similar 1.50%, the round trip on coin B has given up roughly 3% of the position to the book before fees, funding or any opinion about direction.
Depth is not constant, and it leaves when you need it
The book you measured is a snapshot of orders that can be cancelled for free, and most of them will be. Depth therefore varies in ways that are predictable in kind if not in size.
- It thins out at quiet hours. Crypto trades all day, but the people and systems providing depth do not all work all day, and a weekend book is not a weekday book.
- It vanishes in fast moves. Market makers widen or pull quotes when they cannot price the risk, so the moment that generates urgency is the moment the book cannot absorb it. This is why slippage is worst on exactly the candles you most want to trade.
- It vanishes around events. Listings, delistings, unlocks, scheduled announcements, exchange maintenance - depth is withdrawn in advance by whoever can read a calendar.
- It is not symmetric. A book can be deep on the bid and thin on the ask, or the reverse, and your exit uses the other side from your entry.
The practical form of all this: depth measured on a calm screen is an upper bound, not an estimate. Whatever you can trade comfortably in a quiet market is more than you can trade comfortably in the one you will actually be exiting into.
Measuring your order against the book
There is one simple ratio worth computing before any order, and it takes ten seconds: how much of the nearby resting depth does your order consume?
resting asks within 0.5% of mid = 120,000 your order = 12,000 share of depth 12,000 / 120,000 = 10% and for a larger order on the same book: your order = 60,000 share of depth 60,000 / 120,000 = 50%
Those two orders are not the same trade with different sizes. The first takes a slice of what is there; the second is most of what is there, and a book that is half consumed by one participant prices accordingly. The relationship between size and cost is not linear, and the ratio above is the cheapest warning you will get.
The other measurement that pays for itself is to compute the walked average fill - the arithmetic in the coin B example - before sending the order rather than discovering it afterwards. Most exchange interfaces show you enough of the book to do it.
Size is a decision, and it is yours
Everything above is measurement, and measurement is where this lesson stops. We do not tell anybody what size to trade, here or anywhere - it depends on an account we cannot see and a tolerance we cannot know. What we can say is what the arithmetic makes visible.
- The cost of a size is not a fixed percentage. It is read off the book, and it changes with the coin, the hour and the state of the market.
- A size that is comfortable to enter may not be comfortable to exit, because the exit happens on the other side of the book and often in a worse market.
- Scaling an order into pieces changes what you pay and adds a fee per piece. Whether that trade-off is worth it is arithmetic you can do with the numbers in this lesson.
- The same amount of money is a different fraction of the book on a large coin and a small one. Treating "the same size" as the same risk across coins is a measurement error.
See the risk disclaimer. Nothing here is a recommendation about how much to trade.
What the book cannot tell you
- It is a snapshot, not a commitment. Resting orders can be cancelled in microseconds and cost nothing to place, so some of the depth you are measuring has no intention of ever trading.
- Hidden and iceberg orders exist. Some real size is not displayed at all, which means the visible book can understate depth as well as overstate it.
- It is one venue. Depth for the same coin is spread across exchanges, and the order you send only reaches the book you sent it to.
- It says nothing about who. A deep book and a single large resting order look similar from the outside and behave nothing alike.
- It does not predict. Depth above price is not resistance and depth below is not support. Orders are not obstacles; they are offers, and they can be withdrawn the moment the price approaches.
That last one deserves emphasis because it is sold as an edge. A wall of resting orders is a wall only for as long as the person who placed it wants it there, and it is free for them to remove. A book is a good description of what trading right now would cost, and a poor description of the future.
The terms, defined
- Liquidity
- The ability to trade a given size without moving the price much. A property of a coin, a size and a moment together.
- Depth
- How much quantity rests in the book within some distance of the mid price. The measurable version of liquidity.
- Market depth chart
- The cumulative view of resting size either side of the mid. Useful for measuring cost, and not a map of future support.
- Volume
- How much actually traded over a period. A historical total, which can be large while the book is empty.
- Market maker
- A participant who quotes both sides to earn the spread. Quotes widen or disappear when the risk cannot be priced.
- Iceberg order
- A large order that displays only part of its size, so visible depth understates what is really there.
- Walking the book
- Computing the average price an order would get by consuming levels in turn. The arithmetic that turns a book into a cost.
What this means in practice
- Look at the book before the chart, and read depth as well as spread.
- Walk the book for your intended size and compute the average fill before sending the order.
- Compute your order as a share of nearby resting depth. A large share is a warning that arrives for free.
- Price the exit too, on the other side of the book, in a worse market than the one you are looking at.
- Never treat volume as evidence of depth; they are different measurements of different things.
- Do not read a wall of resting orders as a level. It costs nothing to place and nothing to cancel.
Nothing in this lesson is financial advice or an instruction to trade. See the risk disclaimer. We never recommend a leverage setting - that decision is yours.