How liquidity works

How liquidity works

Most exchange markets are P2P trading platforms (NYSE, BSE, NSE, etc). There’s a buyer and a seller. However, two individuals won’t always be available to buy or sell at the same time.

Whenever an investment is bought or sold, there must be someone on the other end of the transaction. If you want to buy 100 shares of YES for a particular event, for example, you must find someone who wants to sell 100 shares of YES for that event. It's unlikely, though, that you will immediately find someone who wants to sell the exact number of shares you want to buy. This is where market makers come in.

All exchanges have Market Makers. Just as traders trade for profit, market makers help to make markets by giving liquidity and earning small spreads. Market makers—usually banks or brokerage companies—are always ready to buy or sell at least 100 shares of a given stock every second of the trading day at the market price. This is called liquidity.

Liquidity is the ease with which assets or securities may be bought or sold in the market for conversion into cash.

It is due to the presence of market makers in an exchange that the volumes in an event contract (or stocks) are created. Without the market makers, the stock will be highly illiquid and traders will not be too keen on trading it.

Once there is liquidity in an event, the matchmaking is quicker and you’re able to buy or sell shares almost instantaneously.

Market liquidity is important for a number of reasons, but primarily because it impacts how quickly you can open and close positions. A liquid market is generally associated with less risk, as there is usually always someone willing to take the other side of a given position.

So, if there is Liquidity, you can buy in bulk or be more aggressive. Prices are much closer to what you want them to be so that you can avoid slippage.