Liquidity Checklist: How to Tell If a Market Is Tradable
Why you need a liquidity checklist
In prediction markets, most mistakes happen before the trade. Traders enter markets that look interesting but are not tradable at their size.
A simple liquidity checklist prevents the most expensive problems: wide spreads, thin depth, slow fills, and exits that cost more than the strategy can earn.
The checklist (use this in 30 seconds)
1) Check the bid ask spread
Look at the bid ask spread at the top of the order book.
• Tight spread often means lower friction.
• Wide spread is a warning that you will pay more to enter and exit.
Do not look only once. Watch for a few seconds to see if the spread is stable or jumping.
2) Check depth at the top
Check depth at best bid and best ask.
• If depth is small relative to your intended size, assume slippage.
• If depth disappears quickly, the book is unstable.
Top of book depth is not guaranteed, but it is still the fastest sizing signal.
3) Check depth beyond the first level
Scan the next price levels. You want to see how much size is available within a reasonable price band.
This tells you how much the market will move if you trade size.
4) Check recent trading activity
Is the market active right now?
• If there are no recent trades, you may get stuck.
• Low activity often means stale quotes and harder exits.
5) Check quote freshness
Do bids and asks update regularly, or do they look stale?
Stale quotes are common in thin markets. They make spreads and midquotes unreliable.
6) Check for spread widening regimes
Ask: is this market in a stress regime?
• Around news
• Close to expiration
• During fast price movement
In these periods, liquidity providers often pull quotes and spreads widen rapidly.
7) Check your exit plan
Most traders only evaluate entry. A market is tradable only if you can exit.
Ask: if I need to get out quickly, will I be able to, and at what cost?
This is where round trip cost matters.
8) Check fees and total cost
Execution cost is not only spread. Add trading fees and you get all in cost.
If your expected edge is smaller than costs, the market is not tradable for your strategy.
Red flags (skip the market)
• Spread is wide and stays wide.
• Depth is tiny and disappears.
• No recent trades or volume.
• Quotes look stale.
• You cannot describe how you will exit without paying a lot.
Quick scoring (optional)
If you want a fast rule of thumb, score 0 or 1 for each item:
• Spread acceptable for your strategy
• Depth acceptable for your size
• Book has multiple levels of depth
• Market is active now
• Quotes are fresh
• No obvious stress regime
• Exit looks realistic
• Costs lower than your expected edge
Markets scoring 6 to 8 are usually tradable. Markets scoring below 5 are usually not worth the friction.
Takeaway
Liquidity is not a vibe. It is visible in spread, depth, and activity. Use this checklist before every trade and you will avoid the most common way prediction market traders lose money: paying too much to enter and exit.
Related
• Order Book Basics for Prediction Markets
• Depth at Best Bid and Ask: The Most Misunderstood Number