2014/04/6
liquidity
Is there a standard definition? Does it have a unit? Is it even a number?
I’m going to take a stab. Without loss of generality I’ll define liquidity availability for buying (selling is analogous), as a unitless function \(L($,s)\) over transaction amount \($\) and time limit \(s\). Operationally, it means to take \($\) amount of a tradable asset, convert into number of shares \(N\) at the current price (assume it exists) and request to transact \($\) using all possible algorithms that complete in \(s\) seconds and find the one that got the most shares \(N^*\), then \(L($,s) = N^*/N\), a number between 0 and about 1 (for most cases). The larger it is, the more liquidity there is at the \(($,s)\) pair. \(L\) is monotonically decreasing in \($\) and monotonically increasing in \(s\).
(Read the article)
