Liquidity risk appears when the market cannot absorb your size without moving price. On the Gold path it is a primary risk, not a marginal note.
Gold path — Module: Advanced risk control. Part of gold-path.
Who this is for
- Anyone operating with size significant relative to the book.
- Anyone trading assets with irregular depth.
- Anyone who wants to avoid forced exits with explosive costs.
Prerequisites — Complete silver-path first (min.: max-daily-risk, max-drawdown, robustness, backtest). Foundation: bronze-path.
In plain terms — You can be right on direction and still lose because of the exit. Without liquidity you pay much higher spread, slippage, and impact.
Key controls
Measure average depth and book resilience during operating hours. Estimate the percentage of ADV your size represents. Define maximum limits per single order and per time window. Prepare gradual exit procedures under stress. Integrate liquidity risk into overall portfolio limits.
Example — You need to exit quickly from a position on a thin market during news. The book empties, spread doubles, and execution worsens beyond expectations. With preventive rules you would have reduced size before the event.
Card
- Goal: ensure realistic executability of the plan.
- Key inputs: book depth, ADV, spread, impact.
- Warning sign: partial fills and rising slippage.
- Typical mistake: estimating costs with calm-market data.
- Practical action: dynamic size limits and tranched exit.