[MUSIC] Until now you've looked at the different types of orders status may use including additional instructions that may be included. Next, we turn to understanding what liquidity is. We will also look the various dimensions of liquidity. This will help us better understand and measure transaction costs that we incur while trading. Let's first formally define what liquidity is. It is the ability to trade quickly, in the quantity you want, and at a low cost. It is one of the most important characteristics of an exchange. There is a common saying that liquidity begets liquidity. Regulators and exchanges aspire to have highly liquid market places as this attracts traders in large numbers thereby increasing liquidity even more. There are a number of dimensions of liquidity. The first is immediacy. It tells us how quickly can trades of a given size be executed at a given cost. For example, say you want to buy 100 shares of a stock, and do not want to pay more than $0.05 a share in transaction cost. How long will it take for you to execute this order? If you buy the 100 share at the cost of $0.05 a share, almost immediately the market is extremely liquid as it provides a high level of immediacy. A second dimension of liquidity is the width of the market. This measures what the cost of trading a given size is. What will it cost you to buy 100 shares? This is usually measured by the bid-ask spread. A narrow spread tells us that the transaction costs are low and the market is very liquid. On the other hand, wider spreads indicate that markets are illiquid. A third dimension of liquidity is the depth of the market. It measures the trade size that can be executed at a given cost, for example if the bid ask spread is $0.05, how many shares can be traded without changing the spread? If there are a large number of shares to be bought and sold at the best bid and ask prices, then you can trade a large order without moving prices much. Here again we would prefer markets with high depth. The fourth dimension of liquidity is resiliency. It tells us how quickly prices revert to previous levels after a large trade is executed. For example, say an order for 10,000 shares moves prices by $0.50 and the bid are spread wide as from $0.05 to $0.55. If traders refill the order book quickly and bring down prices by $0.50 and the bid-ask spread back to $0.05, then the market is said to be resilient. A liquid market is where traders can execute large orders with minimal price impact almost instantaneously. Even when prices move on account of a large order, markets are liquid if prices revert quickly. Next time we will start discussing how to measure transaction cost and the various benchmarks we use for it. [MUSIC]