Liquidity, and Why the Same Order Costs More at 2am

The short answer

Liquidity is depth: how much can trade near the current price before the price has to move. A thin book does not change the quote you see, it changes how far your order travels past it — which is why the same order costs more at a quiet hour and why slippage grows with size.

Two traders place an identical order in the same instrument through the same broker. One does it in the middle of the busiest hours of the day. The other does it twelve hours later. They are charged the same commission and see a similar quote, and one of them pays noticeably more.

The difference is liquidity, and it is the least visible item on this site's ledger because it never appears as a number anywhere.

What liquidity actually means

Liquidity is depth: how much can be traded near the current price before the price has to move to find someone else.

A quote shows you the best bid and the best ask. What it does not show is how much is available at each. Behind the best price there is a finite quantity; behind that, further quantities at worse prices.

A deep market has substantial size resting close to the current price, so an ordinary order is absorbed without the price moving much. A thin market has very little, so the same order eats through the available size and continues into worse levels.

This is why the quote can look fine and the fill can be poor. The quote describes the best price. Depth describes how long that price survives contact with your order.

The interaction with size

Liquidity is not a property of the market alone. It is a relationship between the market's depth and your order's size.

An order small relative to what is resting is absorbed at or near the quote. An order large relative to it consumes the best level and continues down the book, and the price you actually receive is an average across every level it touched — worse than the quote you saw.

So "is this market liquid" is an incomplete question. The complete one is "is this market liquid relative to the size I am about to trade", and the answer changes with both terms. A size that is unremarkable during peak hours can be genuinely disruptive in a quiet window.

Where the depth is

Participation is heavily concentrated, and the concentration is the practical fact.

The Bank for International Settlements' Triennial Survey put average daily turnover in over-the-counter foreign exchange at 7.5 trillion US dollars per day in April 2022. Within that, FX swaps accounted for 51% of turnover and spot for 28% — about 2.1 trillion US dollars per day. The US dollar was on one side of 88% of all trades; the euro, second, on 31%.

Two things follow for anyone paying trading costs.

Instrument matters. The distance between an instrument on the busy side of that distribution and one well down it is not marginal. It is the difference between a book that absorbs your order and one that notices it.

Hour matters, possibly more. A market's depth follows the working hours of the centres that trade it. The same instrument is a different proposition at different times of day, and the quiet window is quiet for everyone, not just for you.

These are April 2022 daily averages reported net of inter-dealer double-counting. They describe the structure of the market rather than conditions on any given day.

Why 2am is the expensive hour

Nothing mystical happens overnight. The people who would otherwise be standing on the other side of your trade are not working.

Fewer participants means less resting size, which means a given order travels further to fill, which means a worse average price. It also means the quote itself is likely wider, because whoever is quoting is doing so with less confidence of being able to pass the position on.

The two effects compound. The spread is wider and the depth behind it is shallower, and both of them are costing you on the same order.

What to do about it

This is one of the more tractable problems on the ledger, because it is mostly a scheduling question.

Trade when the market you are trading is actually awake. Find out which centres matter for your instrument and when their hours overlap. The overlap is usually the deepest part of the day.

Size to the conditions, not to the plan. If circumstances require trading in a thin window, a smaller order travels less far through the book. The trade-off is slower execution, which may be fine.

Treat quiet instruments as permanently thin. Something that was never heavily traded does not become deep at a convenient hour. Its costs are structurally higher and no broker can fix that, because it is not theirs to fix.

Be sceptical of your own evidence. One bad fill at a quiet hour is a story, not data. If you suspect your execution is poor, record it across comparable conditions. Most of what gets blamed on a broker turns out to be the hour.

Where this sits

Depth sits underneath the complete list of what you pay, and it is the same force behind spreads widening.