Liquidity is About the Number of Traders. Certainly this was the hope of many new e-markets, which boasted about the thousands of market participants that had been signed up. But of course, the presence of a large number of traders is no guarantee of any transactions actually taking place. A large number of traders is not a sufficient condition to create liquidity. Nor is it a necessary condition-there are very active, successful markets that are composed of relatively small groups of traders, such as private procurement marketplaces or dealer markets.
Liquidity is About the Number of Transactions.
The empty argument that a market was successful based on the number of registered participants died quickly. In its place came an appropriate obsession with the number of transactions in a market. While high transaction volume is sufficient to create a liquid marketplace, it is not strictly necessary. A low volume market can be successful for its participants if it is possible to tap into a related large, deep market through arbitrage. The opportunity for arbitrage within markets may be the single most powerful feature in building liquidity, whether it is arbitrage between a good and its financial derivatives or purely financial products.