# Measuring Liquidity > Liquidity can be measured with spreads, depth, volume, turnover and price impact. Learn the key measures, formulas and how to use them before you trade. Source: https://learn.tradelabsai.com/market-structure/measuring-liquidity/ Track: Market Structure · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Measuring Liquidity", https://learn.tradelabsai.com/market-structure/measuring-liquidity/ Saying a market is "liquid" or "illiquid" is useful, but traders and risk managers need numbers. Liquidity has several dimensions, and no single measure captures all of them. This lesson covers the main measures, what each one tells you and how to use them to decide what and how much to trade. ## The dimensions of liquidity | Dimension | Question | Typical measures | |---|---|---| | Tightness | How much does it cost to trade a small amount? | Quoted and effective spread | | Depth | How much can trade near the current price? | Size at best prices, depth within a band | | Resilience | How quickly do prices recover after a large trade? | Recovery time of spreads and depth | | Immediacy | How fast can you trade? | Time to fill, fill rates | | Breadth | How many participants and trades? | Volume, number of trades, turnover | ## Spread measures ``` Quoted spread % = (Ask − Bid) ÷ Midpoint × 100 Effective spread % = 2 × |Trade price − Midpoint| ÷ Midpoint × 100 ``` The **quoted spread** is what you see on screen. The **effective spread** measures what trades actually pay relative to the midpoint, capturing price improvement or slippage. Tracking spreads at different times of day reveals when a market is cheapest to trade. See [Bid-Ask Spread](https://learn.tradelabsai.com/markets/bid-ask-spread/). ## Depth measures Add up the size available within a set distance of the midpoint, such as 10 basis points or 5 ticks, on each side. Comparing that depth with your order size shows whether you can trade without walking the book. See [The Order Book and Market Depth](https://learn.tradelabsai.com/market-structure/the-order-book-and-market-depth/). ## Volume and turnover - **Average daily volume (ADV):** shares or contracts traded per day, usually averaged over 20 days. - **Dollar volume:** volume times price, comparable across assets. - **Turnover:** volume divided by shares outstanding or free float. **Example: Order size as a share of volume** A stock trades 400,000 shares a day. Your planned order is 20,000 shares, 5% of ADV. That is large enough to move the price noticeably if traded at once. A common guideline is to keep orders to a small percentage of daily volume, often under 1% for a single quick trade, and to spread larger orders over time. ## Price impact measures Price impact estimates how much prices move per unit traded. - **Amihud illiquidity ratio:** the average of absolute daily return divided by daily dollar volume. Higher values mean prices move more per dollar traded, a sign of illiquidity. It is popular in research because it only needs daily data. - **Kyle's lambda:** from market microstructure theory, the price change per unit of net order flow. - **Square root impact models:** estimate impact from order size relative to volume and volatility. See [Market Impact](https://learn.tradelabsai.com/orders/market-impact/). ## Practical liquidity checklist before a trade 1. **Spread:** what percentage of price is it right now? 2. **Depth:** is there enough size at the best prices for your order? 3. **Volume:** what is your order as a share of average daily volume? 4. **Time:** are you trading in a liquid part of the day? 5. **Exit:** could you get out quickly in a stressed market at a reasonable cost? ## Liquidity changes, especially in stress Liquidity measures taken on calm days can badly overstate liquidity in a crisis. Spreads widen, depth disappears and resilience falls just when many traders want to exit. Risk managers therefore look at liquidity in stressed periods and use it to set position limits. See [Liquidity Risk](https://learn.tradelabsai.com/portfolio/liquidity-risk/). ## Frequently asked questions ### How do you measure a stock's liquidity? Look at the bid ask spread as a percentage of price, the depth of the order book near the price, average daily dollar volume and estimates of price impact. ### What is a good average daily volume? It depends on your size. The key is that your typical order is a very small fraction of daily volume and of the size shown at the best prices. ### What is the Amihud measure? A research measure of illiquidity: the average ratio of absolute daily return to dollar volume. Higher values indicate that prices move more per dollar traded. ## Sources - Wikipedia, [Market liquidity](https://en.wikipedia.org/wiki/Market_liquidity) ## Continue learning - Previous lesson: [Opening and Closing Auctions](https://learn.tradelabsai.com/market-structure/opening-and-closing-auctions/) - Related: [Opening and Closing Auctions](https://learn.tradelabsai.com/market-structure/opening-and-closing-auctions/): Exchanges open and close with auctions that match orders at one price. Learn how auctions work, imbalance data, why the close is so busy and how traders use it. - Related: [Liquidity](https://learn.tradelabsai.com/markets/liquidity/): Liquidity is how easily you can trade without moving the price. Learn the signs of a liquid market, how illiquidity costs you and when liquidity disappears. - Related: [Bid-Ask Spread](https://learn.tradelabsai.com/markets/bid-ask-spread/): The bid-ask spread is the gap between the best price to buy and the best price to sell. Learn how to read it, what it costs you and how to pay less of it. - Related: [The Order Book and Market Depth](https://learn.tradelabsai.com/market-structure/the-order-book-and-market-depth/): The order book lists every waiting buy and sell order by price. Learn to read market depth, what imbalances show, spoofing risks and how depth affects fills. - Related: [Market Impact](https://learn.tradelabsai.com/orders/market-impact/): Market impact is the price movement caused by your own trading. Learn temporary and permanent impact, the square root rule of thumb and how large traders reduce it. - Related: [Volume](https://learn.tradelabsai.com/markets/volume/): Volume is the number of shares or contracts traded in a period. Learn how to read volume bars, what high and low volume mean and how volume confirms price moves. - Related: [Liquidity Risk](https://learn.tradelabsai.com/portfolio/liquidity-risk/): Liquidity risk is the danger of being unable to trade quickly at a fair price, or running short of cash. Learn its two types, how to measure it and controls.