Liquidity Checklist: How to Tell If a Market Is Tradable
Why tradability matters
In prediction markets, small edges are fragile. If you enter a thin market, slippage and spread can erase your edge even when your predicted probability is good.
This guide is a practical pre trade checklist for liquidity and execution quality. Use it before you click buy or sell.
Step 0: Confirm the basics
Before you evaluate liquidity, confirm you understand the contract you are trading:
• Confirm price scale (0 to 1 vs 0 to 100).
• Confirm settlement rules and the oracle source.
• Watch for ambiguous outcome risk and dispute language (dispute).
A market can have great liquidity and still be a bad trade if settlement is unclear.
The tradability checklist
1) Start with bid, ask, and spread
Look at the executable quotes:
• Bid (what you can sell into)
• Ask (what you can buy at)
• Bid ask spread (the cost of immediacy)
If the spread is wide, you are paying a tax before fees and slippage. Wide spread is often the first sign a market is not tradable at normal size.
2) Check order book depth, not just the top quote
Open the order book and look beyond the best bid and ask:
• Is there meaningful size at the top level?
• How quickly do prices move as you go down the book?
• Are there big gaps between levels?
Thin top of book plus steep gaps usually means you will pay slippage if you trade size.
3) Use mid price as a reference, not an assumption
The mid price is useful for measurement, but it is not your fill price. If you take liquidity, you trade at bid or ask, not at mid.
Bad habit: computing implied probability off mid, then executing at ask and wondering why the trade underperforms.
4) Compare last trade to current quotes
Last traded price can be stale. Ask yourself:
• Is the last trade near current bid and ask?
• Is there recent volume, or is the tape quiet?
If the last trade is far from current quotes, do not treat it as the market price for decision making.
5) Estimate slippage and execution risk at your size
Execution risk rises when you trade large relative to liquidity. A simple approach:
• Find your target size.
• Walk the book mentally and estimate your average fill if your order consumes multiple levels.
• Translate that average fill into implied probability and re evaluate edge.
If your edge shrinks dramatically once you use realistic fills, the market is not tradable for that size.
6) Add fees and maker taker effects
Fees are separate from spread:
• Check fees and trading fee.
• Confirm whether you are acting as maker or taker under maker taker rules.
Then compute whether your predicted probability clears break even probability after all in costs.
7) Plan the exit before you enter
If you might exit early, you may cross the spread twice. That changes your all in cost and can flip EV. Do this before entry:
• Identify the likely exit path (sell YES or buy back NO).
• Check whether exit liquidity is comparable to entry liquidity.
• Assume exit is worse during volatility and near deadlines.
Red flags that usually mean "do not trade"
• Spread is wide and stays wide.
• Top of book size is tiny, and the next level is far away.
• Quotes flicker or disappear frequently.
• You cannot explain settlement cleanly in one sentence.
• Fees are complex or unclear, and the platform does not show an estimated cost before confirmation.
Worked example: healthy vs unhealthy liquidity
Healthy
• bid 49, ask 51
• multiple levels with meaningful size near the top
• you can trade your size with limited book walking
This is usually tradable if your edge clears fees.
Unhealthy
• bid 42, ask 58
• tiny top size and large gaps behind it
• your size would move the average fill toward the bad side
This is often not tradable unless you are trading very small or posting patient maker orders with realistic fill expectations.
Takeaway
Tradability is a liquidity and execution question, not a belief question. Confirm scale and settlement, then evaluate bid, ask, spread, depth, fees, and exit liquidity. If you cannot estimate realistic fills and break even, do not trade the market at that size.
Related
• Fees vs Spread: The Two Costs Most Traders Mix Up
• Slippage, Price Impact, Execution Risk: Why Good Forecasts Still Lose Money