What It Means to Provide Liquidity

The term liquidity is often used in reference to how much of a particular financial product can trade each day (this is also called daily volume) or how much can trade at a certain price. It is a relative term which makes it difficult to have a precise meaning for any one financial product. For example, a bond with a total principal amount of £1 billion that only trades £10 million a week on average across all market participants would not be considered very liquid; however, if that bond traded £100 million every day on average, it would be considered more liquid. If a company has 10 million shares and only 1,000 trades each week on average, the shares would not be considered very liquid; however, if 50,000 ...

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