Chapter 14 · Liquidity
Why does a $1 million purchase barely move one coin but move another by several percent?
- Skills to practice
- Understand marketsActual execution
- Read first
- Chapter 13 · Order book
- 3D simulation
- Trading hall · Liquidity(planned)
Market scene
Zhe trades for a small fund. On Monday morning he receives two tasks: buy $1 million of each of two coins.
The first is a major coin priced at $60,000. A market buy fills in a second at an average $60,006, $6 above the previous displayed midpoint. Relative to buying at 60,000, the $1 million costs about $100 extra. Price barely moves.
The second is a small coin priced at $2. He again buys immediately and fills in a second.
This time the displayed price jumps from $2 to $2.08. He consumes 41 ask levels, averaging $2.0397. Compared with buying at $2, the $1 million costs almost $19,500 extra.
Same money, same second: why does one cost $100 extra and the other nearly $20,000?
Your decision
Your boss asks you to buy another $1 million of the small coin tomorrow. Today's book matches the one Zhe faced. How will you buy?
Observe the result
The same money incurs almost two hundred times the cost in the second market.
Zhe acts identically. The difference comes entirely from depth: the major coin offers $500,000 every 0.01%, so $1 million consumes two levels. The small coin offers $25,000 every 0.1%, requiring 41 levels.
The choices show:
- Order size is relative to available opposite-side orders, rather than dollars alone. $1 million is small in the major coin but moves the small coin about 4%.
- Faster execution costs more. Splitting, waiting, and resting orders exchange time for price.
- Some amounts simply cannot fit into a market. The last choice is easily overlooked.
The mechanism
Chapter 13 explained that an immediate purchase consumes asks from cheapest upward. Here, focus on how much rests on the other side.
The small coin offers equal quantity every 0.1%, so:
- More money consumes more levels. Levels consumed and price movement are proportional to amount: $500,000 moves price 2.05%; $1 million, 4.05%; $2 million, 8.05%.
- Average price is approximately halfway between the starting and final prices, so its increase is also proportional to amount.
- Extra cost equals amount times the average-price premium. Both scale with amount, so extra cost scales approximately with its square: double the order, nearly quadruple the cost.
| Purchase amount | Average-price premium | Price movement | Extra cost |
|---|---|---|---|
| $500,000 | 1.00% | 2.05% | About $4,934 |
| $1 million | 1.99% | 4.05% | About $19,482 |
| $2 million | 3.95% | 8.05% | About $75,974 |
- Order amount
- Levels consumed
- Final price
- Average price
- Extra cost
The table makes a friendly assumption: everyone else does nothing while you order. In reality, sellers may cancel to seek higher prices, and observers may follow the buying. Your order consumes visible liquidity and changes other people's behavior, so actual cost is usually larger than this table suggests.
What it is called
Total resting orders within a price range. A common measure is “±2% depth,” the dollars resting within 2% above and below the midpoint. The major coin has $100 million within the upper 2%; the small coin only $500,000. Depth is the most direct liquidity measure.
The difference between average execution and the best opposite-side quote at submission, introduced in Chapter 13. The small coin's $1 million order has about 1.94% slippage; the major coin, only 0.005%. Slippage is execution cost rather than an exchange charge.
How far your order moves price. Some impact fades as sellers replenish; some remains because others infer information from your buying. A larger order-to-depth ratio creates greater impact.
A price interval with no resting orders. Entering it makes price jump to the far side. Gaps often appear around announcements, late at night, and after sharp movements.
Real markets
Some market-data sites list “+2% depth” and “−2% depth” beside each pair: resting dollar quantities within 2% above and below midpoint.
One coin's depth may vary tens of times across exchanges; major and small coins may differ thousands of times. Checking the figure before ordering gives a rough indication of whether your order is large here.
An approximately $12.5 million ETH market sale consumed bids all the way down. In seconds, price fell from over $300 to $0.10.
The decline triggered stops and leveraged liquidations, producing more sells. Even a deep book cannot withstand an order far beyond its depth. Once price enters an empty interval, it jumps to the bottom.
During sharp moves, many market-making programs cancel orders or widen quotes because resting orders are riskiest then.
The more chaotic the market and urgent its traders, the thinner the book becomes. Liquidity is not fixed; it can vanish when most needed. Chapter 15 explains makers' behavior, and Chapter 18 the resulting downward feedback.
Hands-on
Choose between the two markets and change amount to see extra cost and price movement.
USD 2 per coin; USD 25,000 of orders at every 0.1% price interval
The model assumes no replenishment or follow-on buying while your order executes. Real market impact is usually greater.
Course versionV1-docs; sourcelab:liquidity；Chapter 14 / TRD-MICRO-002
Records parameters and results at the click only; does not mean the experiment passed.View snapshot to save
- In the small coin, move from $500,000 to $1 million, then $2 million. By what multiple does extra cost change? Does it agree with the mechanism?
- Enable “Late weekend night” and buy $1 million. What is the extra cost? Repeat in the major coin.
- Enable “No asks between 1% and 3% above price” and buy $300,000. How far does price move? Why does it gain 2 extra percentage points?
- Find BTC and a small coin's ±2% depth on the same exchange using a data site. Record timestamp. What order amount equals 10% of depth in each market?
Change one variable
These three changes affect only the small coin; other conditions match the opening scene.
Average premium is 3.95%, price movement 8.05%, and extra cost about $75,974—nearly four times the $1 million order.
Doubling amount nearly quadruples cost. Large investors often fear their own orders more than fees.
The same $1 million averages 4.92% above the initial price, moves price 10.05%, and costs about $46,898 extra—more than twice the weekday cost.
In the major coin, the same change costs only about $250 extra. Deep markets have spare capacity; shallow ones quickly run out when orders cancel.
A $300,000 purchase would normally move price 1.25%. It now skips the gap and moves 3.25%. A $1 million purchase moves price 5.95%, with a 3.46% average premium.
Entering a gap makes price jump rather than move one level at a time.
Three depths
- FoundationWhy does a $1 million purchase barely move one coin but move another by several percent?Chapter 14
- AdvancedHow can a Market Impact model estimate the relation between order scale and price movement?Advanced E · Execution and microstructure
- InstitutionalHow does liquidity limit capacity, and how do you exit when it dries up?Institutional
- 3DPrice levels become spatial layers showing bid walls, ask walls, and gaps. Remove resting orders and observe increased impact from the same order.Trading hall
Check two numbers before ordering: opposite-side ±2% depth and your share of it. At more than a tenth, consider splitting, resting, or reducing size.
Remember the relationship: in a uniformly deep book, double the purchase means nearly four times extra cost.
Impact models: this model assumes equal depth at every level and no response from others, so impact scales linearly with amount. Real-market research often finds impact roughly proportional to the square root of order participation in market volume: flatter than this model, yet still substantial for large orders.
The research question: how much impact fades, how quickly, and how much remains? How quickly does consumed depth recover? These determine slice size and intervals. See Advanced E · Execution and microstructure.
Continue the artifact: Estimate costs by changing only order scale or depth.
Capacity: liquidity often determines how much a strategy can manage. At ten times the backtest size, impact may consume all returns.
Exit liquidity: position limits should reflect what can be sold in a crisis, rather than bought normally. Institutions estimate liquidation days per position and stress depth at a small fraction of normal.
Continue the artifact: Recalculate executable capacity under stress.
Questions to take away
Chapter self-test
Its book is much thinner: $25,000 every 0.1%, so the order consumes 41 levels and moves price 4.05%. The major coin has $500,000 every 0.01% and consumes only two levels.
Nearly four times. Final movement and average premium each scale with amount; extra cost multiplies amount by premium, approximately squaring the relationship.
The model assumes nobody responds. Real sellers may cancel for higher prices, and others may follow the buying. Your order changes their behavior.
Sharp moves make resting orders risky. Many makers cancel or widen quotes, thinning the book precisely when people urgently need execution.
One idea to take away
Liquidity describes how quickly and cheaply you can trade. With insufficient depth, your own order moves the price.
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