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In business, economics or investment, market liquidity is an asset's ability to be sold without
causing a significant movement in the price and with minimum loss of value. Money, or cash on
hand, is the most liquid asset. An act of exchange of a less liquid asset with a more liquid asset
obligations, in terms of possessing sufficient liquid assets, and to such assets themselves¦c



 
A liquid asset has some or more of the following features. It can be sold rapidly, with minimal
loss of value, any time within market hours. The essential characteristic of a liquid market is
that there are ready and willing buyers and sellers at all times. Another elegant definition of
liquidity is the probability that the next trade is executed at a price equal to the last one. A
market may be considered deeply liquid if there are ready and willing buyers and sellers in large
quantities. This is related to the concept of market depth that can be measured as the units
that can be sold or bought for a given price impact. The opposite concept is that of market
breadth measured as the price impact per unit of liquidity.
An illiquid asset is an asset which is not readily saleable due to uncertainty about its value or
the lack of a market in which it is regularly traded.The mortgage-related assets which resulted
in the subprime mortgage crisis are examples of illiquid assets, as their value is not readily
determinable despite being secured by real property. Another example is an asset such as a
large block of stock, the sale of which affects the market value.

The liquidity of a product can be measured as how often it is bought and sold; this is known as
volume. Often investments in liquid markets such as the stock market or futures marketsare
considered to be more liquid than investments such as real estate, based on their ability to be
converted quickly. Some assets with liquid secondary markets may be more advantageous to
own, so buyers are willing to pay a higher price for the asset than for comparable assets
without a liquid secondary market. The liquidity discount is the reduced promised yield or
expected return for such assets, like the difference between newly issued U.S. Treasury bonds
compared to off-the-run treasuries with the same term remaining until maturity. Buyers know
that other investors are not willing to buy off-the-run so the newly issued bonds have a lower
yield and higher price.

Speculators and market makers are key contributors to the liquidity of a market, or asset.
Speculators and market makers are individuals or institutions that seek to profit from
anticipated increases or decreases in a particular market price. By doing this, they provide the
capital needed to facilitate the liquidity. The risk of illiquidity need not apply only to individual
investments: whole portfolios are subject to market risk. Financial institutions and asset
managers that oversee portfolios are subject to what is called "structural" and "contingent"
liquidity risk. Structural liquidity risk, sometimes called funding liquidity risk, is the risk
associated with funding asset portfolios in the normal course of business. Contingent liquidity
risk is the risk associated with finding additional funds or replacing maturing liabilities under
potential, future stressed market conditions. When a central bank tries to influence the liquidity
(supply) of money, this process is known as open market operations.

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In the futures markets, there is no assurance that a liquid market may exist for offsetting a
commodity contract at all times. Some futures contracts and specific delivery months tend to
have increasingly more trading activity and have higher liquidity than others. The most useful
indicators of liquidity for these contracts are the trading volume and open interest.

There is also dark liquidity, referring to transactions that occur off-exchange and are therefore
not visible to investors until after the transaction is complete. It does not contribute to
publicprice discovery.


In banking, liquidity is the ability to meet obligations when they come due without incurring
unacceptable losses. Managing liquidity is a daily process requiring bankers to monitor and
project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between
short-term assets and short-term liabilities is critical. For an individual bank, clients' deposits
are its primary liabilities (in the sense that the bank is meant to give back all client deposits on
demand), whereas reserves and loans are its primary assets (in the sense that these loans are
owed to the bank, not by the bank). The investment portfolio represents a smaller portion of
assets, and serves as the primary source of liquidity. Investment securities can be liquidated to
satisfy deposit withdrawals and increased loan demand. Banks have several additional options
for generating liquidity, such as selling loans, borrowing from other banks, borrowing from
a central bank, such as the US Federal Reserve bank, and raising additional capital. In a worst
case scenario, depositors may demand their funds when the bank is unable to generate
adequate cash without incurring substantial financial losses. In severe cases, this may result in
a bank run. Most banks are subject to legally-mandated requirements intended to help banks
avoid a liquidity crisis.

Banks can generally maintain as much liquidity as desired because bank deposits are insured by
governments in most developed countries. A lack of liquidity can be remedied by raising
deposit rates and effectively marketing deposit products. However, an important measure of a
bank's value and success is the cost of liquidity. A bank can attract significant liquid funds, but
at what cost? Lower costs generate stronger profits, more stability, and more confidence
among depositors, investors, and regulators.

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1. Tightness:
Tightness refers to low (explicit and implicit) transaction costs.

2. Immediacy:
Immediacy refers to the speed at which orders are executed and settled.

3. Depth:
Depth refers to the existence of abundant orders.

4. Breadth:
Breadth refers to the fact that numerous and large (volume) orders have only a minimal price
impact.

5. Resiliency:
Resiliency refers to the speed at which new orders flow into the market to correct
order imbalances. Because order imbalances tend to move prices away from fundamental
values, for a given permanent change, transitory changes should be minimal in resilient markets
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1. Existence of bid-ask spreads
Models of perfect capital marketsare incompatible with observable bid-ask-spreads.

2. Evaporation of market liquidity

Violent temporary price movements can be observed that cannot be explained by
fundamentals only (e.g. Russian/ LTCM-crisis in 1998). During these market turmoil͛s, it is
difficult and costly to sell assets. However, these price movements are only temporary and
reverse some days later.

3. Movement of asset liquidity

Often, temporary price movements asset a whole market segment or even several markets.
There might be 'market liquidity' risk, i.e. a systemic component in asset liquidity.

4. Flight to quality
Liquidity crises have an asymmetric profile: apart from many assets that collapse, some assets
might experience a price push (like government bonds) as investors 'herd' to them (flight to
quality')
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It is all about stock market where shares are traded, commodity market where large number of
commodities like food grains, cotton, gold, oil, metals sugar etc is both in spot and futures. For
example, Tom buys & sells, **** sells & buys, Harry keeps on buying, Sherry keeps on selling.
The sole aim is to earn profits. The price of a security/commodity fluctuates - some feel it will
go up and buy, while some others think it should go down and sell. In this process long or short
outstanding are built up, the reverse can also happen in the same cycle/ short periods
depending on the market expectation, guess of future prices, so that maximum profits are
earned. People keep guessing and guessing. But, very few succeed while large crowd fails. The
attempts to discover the future price goes on and on. Governmental and large corporate,
market leaders plans & policy, major national and international political upheaval, monsoon,
implication of natural calamities, agriculture & food production, future projection of sales in
autos, chemicals, cotton, consumers, dyes, movement of interest in FIs/Banks, rail & road,
freight tariffs, State and Central governments budgets, future earnings and profits, corporate in
fights and succession battles etc -the list is very long. In this complicated background people try
to guess the real price in future. But markets are highly dynamic, no computer can ever achieve
to project price on real time basis. One may argue that if data is fed continuously then the
computers would churn out most appropriate / near real prices, but that will never happen
because of the time lag, the real prices change faster than the output of the computer. Its so
hard God may also not like it. Market is made out of all these certainties and uncertainties.
Surely, it is very interesting and but highly risky. Higher the risk higher the return be it positive
or negative. Statistical probability does not help here. Interestingly, countable mightiest - the
super duper cartel & market makers having tons of money and holdings call the day, drive the
markets, and public at large in guessing, chartists keep on playing guess game and get fat
salaries. Many people spread rumors also. Print and TV News media plays it for popularity to
increase the TRPs. Market may prove some people mostly right but a large crowd mostly
wrong. BUT STILL IT͛S BEAUTIFUL AND GREAT GAME TO PLAY WITHIN INDIVIDUAL LIMITS.


 

The Indian market, and its one billion plus population, presents lucrative and diverse
opportunities for U.S. exporters with the right products, services, and commitment. In recent
times, the declining value of the dollar, vis-Ƿ-vis competitors' currencies, is expanding and
accelerating these opportunities. India's infrastructure, transportation, energy, environmental,
health care, high-tech, and defense sector requirements for equipment and services will exceed
tens of billions of dollars in the mid-term as the Indian economy globalizes and expands. India's
GDP, currently growing at around 7 percent, makes it one of the fastest growing economies in
the world. Construction of nearly everything from airports to container ports to teleports, is
setting the stage to remake India.

KEY ECONOMIC INDICATORS:

 GDP: $691 billion

 Growth: Estimated 7-8 percent or higher in 2005-06; 7 percent in 2004-05
 Breakdown: Services equal 50 percent of the GDP; industry and agriculture equal 50
percent
 Ranking: 10th largest economy in the world in 2004, and fourth largest in purchasing-
power parity terms
 Per capita income: $603 in 2004-05, (almost double the figure of two decades ago). Of
the 1.065 billion people, 39 percent live on less than $1 per day
 Purchasing power: In 2005, approximately 170-200 million people had growing
purchasing power, thus creating a growing middle-class consumer population
 Youth Power: Over 58 percent of the Indian population is under the age of 20. That is
over 564 million people, nearly twice the total population of the United States

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Exchange in financial markets may be diversified in a variety of dimensions. They may differ in
the attributes of the traded assets, in the location of the exchange, in the time of the
transaction, and in the manner that the transaction takes place. Further, markets differ in the
degree of participation of intermediaries and in the role they play in the market.
Certain aspects of diversification are inherently desirable to market participants. Some types of
financial exchange diversification are necessary for the particular way that the market works,
including the way in which price is discovered in the market. Still other types of diversification
arise naturally out of competition among exchanges. The variety of possible organizations of
financial markets allows for comparisons among them. First we need to define the criteria of
evaluation.
A financial exchange should be structured so as to maximize the satisfaction of participants and
potential participants. This is accomplished by minimizing transaction costs, establishing market
prices that accurately reflect the underlying equilibrium prices, and by reducing the uncertainty
that traders face in market interactions.
Liquidity plays a crucial role in financial exchange markets. Without the availability of counter-
offers, markets cease to exist and they are replaced by individualized bilateral contracts.
Thus, some liquidity is necessary even for the ÷
÷÷of a financial exchange market. Further,
high liquidity expands the set of potential counter-offers and enhances the probability of a
favorable match. Thus, higher liquidity increases the expected level of satisfaction (utility) of
market participants. This is true irrespective of the particulars of the organization of the
market. However, the realization of the enhancing role of market liquidity has very important
implications on the relative benefits and drawbacks of different market organizations. Clearly,

 




of markets tends to increase liquidity. To increase liquidity further, we
consider next the effects of 
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of markets in the form of an electronic call
market¦
Continuous markets tend to exhibit little inherent liquidity. In these markets, liquidity is
provided to a large extent by special intermediaries, market-makers, and specialists. However,
the artificial creation of liquidity increases transaction costs in such markets. In contrast,
electronic call markets inherently exhibit high liquidity because they implement the bunching of
orders over time and their simultaneous execution. Thus, potentially call markets can offer
lower transaction costs than continuous markets.
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