What characteristics are associated with a liquid market?

A liquid market is characterized primarily by the ability to buy and sell assets quickly without causing significant price changes, and this is best represented by narrow bid-ask spreads and depth.

Narrow bid-ask spreads indicate that the price at which buyers are willing to purchase an asset is close to the price at which sellers are willing to sell, suggesting a high level of market activity and efficiency. Additionally, market depth refers to the availability of orders to buy and sell at various price levels, which contributes to the market’s ability to absorb trades without substantial impacts on prices. This combination fosters an environment where transactions can occur rapidly and without considerable deviations in price, which is the hallmark of liquidity.

In contrast, the other choices highlight features that are typically seen in illiquid markets. High volatility and large price jumps signify instability rather than the smooth functioning of a liquid market. A low number of participants and few trades would also indicate a lack of liquidity, as these conditions would generally lead to wider bid-ask spreads and reduced market activity. Lastly, high transaction costs are associated with illiquid markets, where fewer trades typically lead to less competitive pricing and greater costs for participants, complicating the buying and selling process. Therefore, the defining characteristics of a liquid market align