Understanding the Liquidity Score

How the Liquidity Score works

On OctoBot Market Making, exchange trading pairs have a Liquidity Score. This value ranges from 0 to 10.

The Liquidity Score measures how well adapted to the trading demand an order book is.

• A lower liquidity score means that the trading pair’s current order book is not sufficient to provide the necessary liquidity for this trading pair average trading activity.
• A higher liquidity score means that the order book efficiently covers the needs of the trading pair’s average trading activity.

In short, a Liquidity Score below 4 can signal a market that investors might avoid due to lack of liquidity. On the other hand, a liquidity score above 6 will satisfy most investors.
Finally, investors with larger capital will look for markets reflected by a liquidity score of 8 and above.

How the Liquidity Score is computed

The liquidity score takes the following factors into account:

• The market depth of the top of the order book compared to a part of the last 24 hours trading volume
• The bid-ask spread of the order book relatively to the asset price

As a result, the liquidity score remains relevant regardless of a market’s trading volume, as it is a rating of the market’s order book compared to the current trading demand in terms of trading volume.

In other words, a market with low trading activity can reach a high Liquidity Score with a relatively empty order book as long as it covers the daily trading activity requirements and displays a tight spread.