Topic · Trading & Microstructure
← All topicsLiquidity Dynamics
27 articles · 5 checkpoints · 15 deeper reads · 7 reference notes
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A price drop makes market makers more cautious, so they quote less; less liquidity makes the same order move price further; that bigger move makes market makers even more cautious. This feedback loop is how an ordinary selloff becomes a liquidity crisis.
Individual stocks' liquidity doesn't move independently, spreads and depth across a whole market tend to widen and thin together, driven by the same funding and risk-appetite shocks that hit every dealer at once.
A stock trading across sixteen venues looks less liquid on any single book than it did on one exchange, but add up the depth across venues and often nothing has actually been lost. Fragmentation moves liquidity around more than it destroys it.
After a trade eats through the order book, how fast does depth come back? The liquidity half-life turns that recovery speed into a single number you can compare across stocks and regimes.
Liquidity is not a fixed pool sitting in the order book, it is supplied by market makers who can walk away, and demanded by traders who need to fill now. Prices move when the two sides get out of balance.
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