How Does the ‘Spread’ on the Order Book Relate to Market Depth and Liquidity?

The spread (the difference between the best bid and ask) is a direct measure of liquidity. A tighter (narrower) spread indicates high liquidity and deep market depth, as there are many buyers and sellers close to the current price.

A wider spread indicates lower liquidity and shallower depth, meaning a trade is more likely to cause significant price movement (slippage).