Liquidity gap
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Not to be confused with liquidity, liquidity sweep.
Liquidity gap describes a shortfall of resting orders on one side of an order book, so that incoming market orders cannot be filled at or near the best quoted price. The gap is a property of the book at a moment in time, not a chart pattern, and it is usually measured in the size of orders required to move the price by a given amount. It can appear in any instrument, but is most visible in thin or fast-moving markets.
How a gap forms and closes
An order book holds resting bids and offers at quoted prices. When the size available on one side is small relative to the flow of market orders arriving on the other, the first levels are consumed and the price jumps to the next level with resting size. That jump is the gap.
Gaps close when new limit orders arrive to replenish the depleted side, or when the price reaches a level where resting size is again sufficient. In fast markets the gap may persist for only milliseconds; in thin markets it can last longer.
Worked example
Where gaps are most visible
Liquidity gaps are common around scheduled data releases, at market open and close, and in instruments with few participants. They are also more likely when a large order is executed aggressively rather than worked gradually.
Because depth varies by venue, asset and time of day, no single threshold defines a gap; it is measured relative to the size being traded and the depth normally present.
Often confused with
- liquidity
- Liquidity is the general ability to buy or sell an asset without moving its price, whereas a liquidity gap is the specific shortfall of resting orders on one side of the book; the visible sign is that liquidity is a standing property of the market, while a gap is an event that appears when depth is consumed.
- liquidity sweep
- A liquidity sweep is a deliberate order that takes out resting orders across multiple price levels, whereas a liquidity gap is the absence of those orders in the first place; the visible sign is that a sweep shows as aggressive volume hitting the book, while a gap shows as a price jump through empty levels.