Stock liquidity — measuring tightness, depth and price impact
Is this stock liquid? Read the spread and the Amihud ratio.
A tight spread is cheap to round-trip and a low Amihud ratio means a dollar of trading barely moves the price. Both point to a liquid name. The Amihud ratio is the one to watch: higher Amihud = more price impact per dollar = LESS liquid.
Quoted spread %
0.08%
= US$0.04 / mid US$50.00
Amihud ILLIQ (×10⁶)
1.60e-5Liquid
raw 1.60e-11 per US$ traded
Spread costs and turnover (% of mid-price / float)
Mid-price Pₘᵢ𝒹 = (ask + bid)/2US$50.00
Quoted spread Pₐₛₖ − P_bidUS$0.04 (0.08%)
Effective spread 2·|Pₑₓₑ𝒸 − Pₘᵢ𝒹|US$0.02 (0.04%)
Turnover Volume / Shares out.0.50% / day
Daily dollar volume P · VolumeUS$500100000
Amihud ILLIQ |Rₜ| / (P·Volume)1.60e-11 (×10⁶ = 1.60e-5)
A tight spread of 0.08% and a low Amihud ratio mark this as a liquid name: a dollar of trading barely nudges the price.
Spread % 0.08%Turnover 0.50%Amihud verdict Liquid
Try this. Load the small-cap, then drag daily volume up toward the blue-chip level. Watch the Amihud ratio collapse: same price move, far more dollars traded, so each dollar moves the price less. Then drop the daily |return| and notice the spread is unaffected — spread (tightness) and Amihud (price impact) are separate dimensions of liquidity.
Reflect: two stocks share the same quoted spread. Which measure would still tell you they differ in how much a large order moves the price?