The liquidity of a market depends on its organization (exchange or OTC) but also the asset. For example, the Eurodollar market (OTC) is extremely liquid, as the stock market on Wall Street. Unlike the real estate market which is very illiquid. There is no structure of optimal market. There is a continuous rating for large market capitalization and quotation fixing for small caps.
The concept of liquidity is often attached to the depth of the market.
Liquidity risk
It is the loss from costs to liquidate a position. Typically, the illiquidity of the market manifests itself in the form of significant transaction costs, a small number of transactions during the session or a range of high prices.
It is clear that most markets sometimes have liquidity problems. Indeed, many markets do not have an acceptable level of liquidity throughout the session, there are very few markets that can boast of providing an adequate level of liquidity to financial stakeholders.
However, even the liquidity of the major stock exchanges can not be guaranteed. These markets are highly liquid most of the time, but occasionally during sessions crisis, liquidity dries. It is possible to distinguish two types of risk.
The first is that the normal risk increases at the discretion of trade in markets considered illiquid. The second type of liquidity risk is more insidious and can be detected using a Market Scanner. This is the liquidity risk increases during market crises where the market loses its current liquidity.
The risk of loss occurs due to adverse movements in market prices. A market can be very liquid most of the time as shown by Market Scanner and become illiquid during a major crisis. In general, the problems start when drop is experienced, that is, when an excess supply of securities meet a demand which tends to reduce sharply. The price range tends to increase significantly.
This is due to the panic prevailing in the market, all investors want to sell at the same time and affect the order book on the buy side. This also explains the development of reservations trading by the market authorities. In such a situation, there is no longer any investment strategy: everyone wants to sell his position.
In finance, dark pools of liquidity (also referred to as dark liquidity or simply dark pools or black pools) is an internal banking and stock exchange trading platform for the anonymous trading of financial products. They are completed outside of the open of trading securities exchanges.
Dark pools are not subject to the rules and supervision of the stock exchanges.
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