Liquidity In The Crypto Market #008

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Hello great minds,

It is a wonderful opportunity to come before you all today again to discuss on an issue of great importance in the cryptospace.

I trust you are all doing perfectly fine and are enjoying your activities in the community.

It is another beautiful day and we shall be discussing on a topic we began few days ago on liquidity in the cryptospace.

Without wasting any more of our time, join me as we begin our discussion.

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FACTORS CONTRIBUTING TO SLIPPAGE IN THE MARKET

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There are several factors contributing to slippage in the market and we shall be learning some now.

• ORDER BOOK DEPTH:

The depth of an order book has a significant impact on slippage in a market.

As we all know, slippage is the difference between the prices in which an order was initiated and when it was filled.

The order book depth affects slippage in the sense that the depth of the order book serves as a reflection of the available liquidity in the market.

A order book with great depth and substantial volumes of orders at various price levels provides a higher liquidity.

And this makes it possible for large trades to be executed without encountering slippage in the market.

A shallow order book on the other hand containing fewer orders, has a higher probability of causing slippage in the market, especially when it has relationship with the execution of large orders.

The order book depth also has effect on the market.

For example when a market posseses a shallow order book, the available buy orders can be easily depleted by a large sell order, and when this is done, it can cause a sharp decrease in price of a commodity.

• PRICE VOLATILITY:

Price volatility is no new thing in the cryptomarket, as there is usually rapid change in market price.

However, when a market possesses a low order book depth, it is subject to more volatility because very little orders can affect it's market price.

And this volatility can lead to market slippage as market traders try to get their orders filled at expected price.

• ORDER EXECUTION STRATEGY:

There are different strategies that are most often times used to reduce slippage in the market.

For examine the use of limit orders.
Limit orders allow traders to give specific price points in which they are willing to sell/buy and this goes a long way in minimizing slippage by ensuring that price gets triggered at desired levels.

However, this strategy is limited and may not work in markets with low order book depth.

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CONCLUSION

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Order book depth is a very important factor that affects slippage in the market.

As we have learnt, market with a low order book depth suffer a lot from slippage because it lacks enough liquidity.

And lacking enough liquidity implies that it can be influenced by both large and little orders, depending on how illiquid it is.