What is liquidity, and why does it matter so much in prediction markets?

Liquidity determines how easily you can trade without moving the price. Low liquidity increases spreads, slippage, and exit risk.

Detailed Explanation

What liquidity means: Liquidity is the ability to buy or sell a contract quickly at a price close to the current market price. High liquidity = easy trading; low liquidity = costly trading.
How to measure it: Look at the bid/ask spread (tighter is better), the depth of the order book (more shares near the mid-price is better), and consistent volume over time.
Why it matters: Your "paper edge" can vanish once you factor in spread, slippage, and fees. A 5-cent edge means nothing if you pay 6 cents in execution costs.
Exit risk: If you can't exit when you want to, you're locked in until settlement—which may be weeks or months away.

You see a mispriced contract but can't buy enough shares without moving the price against you
You want to exit a position before settlement, but there are no buyers at a reasonable price
You're comparing two markets on the same event—one has tight spreads, the other is illiquid
You're sizing a trade and need to know how much you can buy without excessive slippage

If you're willing to hold until settlement, then exit liquidity matters less (but entry liquidity still matters).
If a market has low volume but tight spreads, then it may still be tradeable for small sizes.
If liquidity is thin now but you expect it to improve (e.g., as the event approaches), then entering early may still make sense.

How to assess liquidity before trading:

Spread: If the best bid is $0.48 and best ask is $0.52, the spread is 4 cents—you lose 2 cents to the spread on each round trip.
Depth: Check how many shares are available within 1–2 cents of the mid-price. If only 50 shares are at the best price, a 500-share order will move the market.
Volume: Look at average daily volume over the past week, not just today. One big trade yesterday doesn't mean liquidity is reliable.
Time of day: Liquidity may be thinner outside US market hours or during holidays.

✅ Measure spread (cents) and depth (shares near mid) before placing orders
✅ Size trades relative to depth—don't be the market (your order shouldn't dominate the book)
✅ Prefer limit orders when liquidity is thin to avoid adverse fills
✅ Track average volume over time, not just today—consistency matters