Liquidity Depth Explained

The Role of the Liquidity Parameter b

The value of b directly determines how steep or flat the cost curve is, which defines the market’s liquidity or “depth.”

High liquidity (b = 100)

• The curve is flatter

• Even large purchases move the price only slightly

• The market can absorb large trades without strong price swings

Low liquidity (b = 20)

• The curve is steep

• Even small purchases cause sharp price increases

• The market is highly sensitive and less liquid

In summary:

• A large b acts like a “buffer,” allowing heavy buy pressure without major price impact.

• A small b makes the market extremely reactive to trade volume.