How Does Low Liquidity in Complex Derivatives Impact the Effectiveness of a Central Limit Order Book?

Low liquidity severely undermines a CLOB's effectiveness by causing wide bid-ask spreads and a lack of market depth. This means there are few buyers and sellers at any given time, making it difficult to execute trades quickly without causing a significant price change, known as slippage.

Price discovery becomes unreliable as the few visible orders may not reflect the derivative's true market value. Consequently, the CLOB fails to provide the efficient and continuous matching it is designed for.