Definition: what pair liquidity means
Pair liquidity is a way to describe how easily a currency pair can be bought and sold at prices near the current market quote. In practical terms, it relates to how much market interest exists at (or close to) specific price levels, often represented as order-book depth.
A worked example is useful here because “liquidity” is not a single number without context. The same pair can look liquid in one moment and less liquid in another, depending on where liquidity sits relative to the price and on trading costs and execution constraints.
Mechanics: how a worked example can be set up
To make an example verifiable, separate stable mechanics from variable conditions:
-
Stable mechanics (assumptions you control in the example):
- You assume a current mid-price.
- You assume a spread (the difference between best ask and best bid).
- You assume depth at several price levels on both sides.
- You assume a trade size that must be filled.
-
Variable market/provider conditions (why reality may differ):
- The order book can change between quote and execution.
- Liquidity can be “thin” farther from the mid-price.
- Your executed price depends on your venue, execution method, and costs.
Example structure:
- Choose a mid-price for a currency pair.
- Choose a bid-ask spread and derive best bid/ask.
- Provide simplified depth levels around the best bid and ask.
- Simulate a buy (consuming sell-side depth) or a sell (consuming buy-side depth) until the trade size is filled.
Worked numerical scenario (with explicit assumptions)
Assume the following for a hypothetical currency pair (no real-time data):
Assumptions (all needed to verify the arithmetic):
- Mid-price: 1.2000
- Spread: 0.0002
- Therefore best bid = 1.1999
- Best ask = 1.2001
- You want to buy a notional equivalent of 100,000 units of the base currency.
- Simplified depth on the ask side (sell liquidity) measured at specific ask prices:
- 1.2001: 30,000 units available
- 1.2003: 40,000 units available
- 1.2005: 50,000 units available
- You fill immediately against the available levels in ascending ask price until 100,000 units are bought.
- Ignore slippage beyond the modeled depth, and ignore any additional fees. (This is a limitation, and we will revisit it.)
Step-by-step fill math:
- Remaining to buy: 100,000.
- Buy 30,000 at 1.2001.
- Remaining: 70,000.
- Next level:
- Buy 40,000 at 1.2003.
- Remaining: 30,000.
- Next level:
- Buy 30,000 at 1.2005 (out of 50,000 available).
- Remaining: 0.
Compute total cost and average execution price (assumes linear averaging by units):
- Total cost = (30,000 × 1.2001) + (40,000 × 1.2003) + (30,000 × 1.2005)
- = 36,003.0 + 48,012.0 + 36,015.0
- = 120,030.0 (in quote-currency units, given the price convention)
Average execution price = Total cost / 100,000
- = 120,030.0 / 100,000
- = 1.2003
How this illustrates pair liquidity:
- If enough sell-side depth exists close to the ask, a larger fraction of your order fills near 1.2001.
- In this scenario, part of the order “walks up” the ask from 1.2001 to 1.2003 and then to 1.2005, raising the average execution price from the best ask level.
A comparable “liquidity changes” scenario (same trade size)
Keep the same mid-price, spread, and trade size, but change only the ask-side depth:
New assumptions:
- Depth at ask prices:
- 1.2001: 90,000 units
- 1.2003: 20,000 units
- Execution: buy 100,000 units immediately.
Fill:
- Buy 90,000 at 1.2001.
- Remaining 10,000, buy at 1.2003.
Average execution price:
- = [(90,000 × 1.2001) + (10,000 × 1.2003)] / 100,000
- = (108,009.0 + 12,003.0) / 100,000
- = 120,012.0 / 100,000
- = 1.20012
Comparison:
- Original average: 1.2003
- Higher-liquidity-at-best-ask average: 1.20012
Both scenarios use the same trade size and price levels, so the difference comes only from how much depth sits near the quote.
Limitations and risks: where worked examples can fail
- Order-book changes between quote and execution: real depth can refresh, cancel, or be pulled, so the levels used in the example may not exist when the trade executes.