Information and education only. Every page, figure and calculator on this site exists to explain how financial instruments work. Nothing here is investment, tax or legal advice, a recommendation, or a valuation you can rely on. Full disclaimer

LiquidityStart here

The price you see is for the size someone else is trading. Liquidity is what it costs, and how long it takes, to turn a position back into money — and it is never a constant.

Two different things wear the same word

  • Market liquidity — can this asset be sold quickly, in size, near the last price? A property is illiquid; a Treasury bill is not.
  • Funding liquidity — can this holder meet cash obligations as they fall due? A solvent institution with no cash today is a failing one.

They are separate, and they feed each other. A funding squeeze forces sales, which drains market liquidity, which lowers prices, which triggers more funding demands. That loop is the mechanism behind almost every fast crisis on the case-studies shelf — see margin & collateral for the collateral half of it.

Three dimensions, not one number

  • Tightness — the bid-ask spread: what a round trip costs at the smallest size. The number quoted in marketing material.
  • Depth — how much can be done at that spread before the price moves. The number that decides what a real position costs.
  • Resilience — how fast the book refills after a large trade. The number nobody quotes and everybody discovers.

An instrument can score well on the first and badly on the other two, which is exactly how a screen showing a one-cent spread hides an exit that takes a fortnight. Market microstructure covers what the order book is actually made of.

What exiting costs

Depth and spread are two views of the same thing. In calm markets the quoted size is large and the spread narrow; under stress the quote thins and widens together, and it happens in minutes, not sessions.
The bid steps backVisible sizeBid-ask spreadCalm → stressDepth at the touch

A position that is small relative to daily volume costs roughly half the spread to leave. Beyond that, trading moves the price against you, and the widely used approximation for that impact grows with the square root of the size traded, not linearly:

$$ \text{impact} \;\approx\; c\,\sigma\sqrt{\frac{Q}{V}} \qquad\quad \text{days to exit} = \frac{Q}{V \times \text{participation}} $$

where Q is the position, V the average daily volume and σ the daily volatility. The coefficient c is an empirical fudge — the calculator below fixes it at 0.5 and says so, because a model with a hidden constant is a model that will be quoted as though it were a law.

Interactive: how long to get out, and what it costsPractitioner

Position size against daily volume — the two numbers that decide whether liquidity is a footnote or the position's dominant risk.

Days to unwind
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Position as a share of daily volume
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Estimated market impact
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One-way cost to exit
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Cost in money
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Reading
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The square-root impact rule with a fixed coefficient of 0.5 — an illustration of the shape of the cost, not a transaction-cost model, and calibrations differ by market, venue and era. Real impact also depends on who else is selling, which is precisely what no model knows. Information and education only.

Liquidity mismatch: the structure that keeps failing

  • The pattern: a vehicle promises daily redemption while holding assets that take weeks to sell. Nothing is wrong until enough people ask at once, at which point the promise and the assets are incompatible by construction.
  • First-mover advantage: early redeemers are paid from the liquid assets, leaving the rest holding a worse portfolio. That is a run incentive built into the product, and it turns a rumour into a queue.
  • Where it appears: open-ended property funds, some high-yield and emerging-market bond funds, private-credit vehicles with redemption gates, and money-market funds holding anything other than government paper.
  • The defences, and their limits: swing pricing charges the leaver for the damage, gates and notice periods slow the queue, side pockets quarantine the illiquid part. All three protect the fund; none of them make an illiquid asset liquid, and each makes the promise smaller than the marketing implied.

Why it vanishes exactly when needed

  • Market makers are not charities. Their inventory risk rises with volatility, so they widen and shrink quotes precisely when volatility spikes. There is no obligation to be there.
  • Everyone's risk model says the same thing at the same time. Volatility-based limits shrink together, which converts a shock into simultaneous selling from unrelated holders.
  • Correlation goes to one. In a scramble for cash, what is sold is what can be sold — so the liquid, unrelated holding falls too. Portfolios diversified in calm markets are not diversified in the moment they need to be.
  • The lesson repeats: 2008 in asset-backed paper, March 2020 in Treasuries themselves, 2022 in UK gilts. In each, the instrument at the centre was one nobody had classified as illiquid.

Reading a holding for liquidity

  • Ask what a real exit costs, not what the spread quotes. The relevant number is your size against daily volume, and it is knowable in advance.
  • Match the promise to the asset. A vehicle offering better liquidity than its holdings is offering you someone else's liquidity, and it will be withdrawn under stress.
  • Assume the worst day, not the average one. Liquidity measured in a calm month describes a market that will not exist when you need to use it.
  • Price the option you are giving up. Illiquid assets should pay a premium for the lock-up. When they do not, you are being paid nothing for the constraint.

Information and education only. This page explains a mechanism in general terms, using simplified textbook models and illustrative figures. It is not advice, not a recommendation, and not a valuation you can rely on. Liquidity conditions differ by market, venue and jurisdiction and change without notice.