Simply said, liquidity is the capacity to buy and sell an asset, and it is regarded as favorable when a large number of market participants are interested in doing so at any volume. Liquidity is improved by how simple it is to acquire or sell the instrument at any given volume.

Since market players compete to receive the best pricing, the spread is typically tighter the more liquid an instrument is. Because there is less demand for the instrument, spreads may be greater and price is typically more volatile when there is little liquidity.