How liquidity work

C

Charles Seu

Hi every body

Please what if we are on a newly opened market (a stock for example)
If a participant buys $1 of stock, the price goes up by $1 and waits or does it continue to go up as long as there is no Counterparty?

This case is not practical but purely theoretical to allow me to visualize more correctly the principle of liquidity

And if he finds a $1 Counterparty, the price stops or goes down because this is some kind of profit taking?

Thanks you for your time
 
Depends how the market works. Not all market use a central limit order book to facilitate trades but that’s what most exchanges use globally.

Market makers (and others) provide liquidity on both side, via limit orders, which make the bid ask spread.

Assuming the bid ask spread doesn’t change then for the price to either tick up or down, all limit orders have to be filled at that price.

If you have 10 contracts @ $1.23 bid then the 10 contracts have to be filled, with market orders, for the bid to quote $1.22.

In reality limit orders are added and removed in nano seconds and most of the depth is fake (Algorithmic spoofing).

When the market is thin the spread can move with no market orders hitting the spread.

ps: Slippage is something the big money is trying to minimize. They don’t want their big orders to consume too many levels of liquidity. Otherwise they get a worst price. That’s why they split their orders into small chunks and watch out to fill big resting limit orders. Usually they try to beat VWAP as their average price.
 
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