Understanding Spread, Slippage, and Liquidity in Crypto Trading

In crypto trading it is important to understand “the spread” between bids and asks, the liquidity on the order books, and how market orders can cause slippage on illiquid books.

This is because many low volume pairs on low volume exchanges can lack the liquidity to fill an order at anything close to market price and can have asks and bids far enough way from each other to have a “spread” that is far away from market price.

In simple terms:

• Market Price: the price an asset is currently going for in general. Should be roughly the average of the last price paid on all exchanges (especially high volume exchanges with liquidity).
• Liquidity [in terms of order books]: the dollar amount of orders on the order books, especially pertaining to orders near the market price.
• The Spread: the gap between the highest bid (buy limit order) and lowest ask (sell limit order).
• Slippage: when a market order chews through orders on the order book and fills higher or lower than the first limit order in line.
• Market Maker: entities who fill the order books to ensure there is liquidity (in exchange they typically run algorithms that do arbitrage and buy/sell to profit from orders being filled).

In short, since some pairs on some exchanges lack liquidity and have a large spread (generally due to a lack of market makers on those books), getting orders filled at a decent price can be a pain or even impossible… and one can have some really gnarly slippage if they try to place a large market order.

Given these potential problems, it is good to be aware of the above terms and the mechanics behind them.