What Exchange Liquidity Teaches Us During Volatility
On October 10, 2025, the cryptocurrency market experienced one of its largest liquidation events in history. In just 25 minutes, $19 billion worth of leveraged positions were wiped out. Bitcoin (BTC) plummeted from $126,000 to $105,000, and Ethereum (ETH) fell by 12%. Even more distressing, some altcoins lost over half of their value on the same day. But beyond the sheer drop in prices, what unfolded in the exchanges’ order books revealed critical insights about liquidity—and its importance during high-stress scenarios.
The Illusion of Liquidity vs. Reality
Exchanges reported massive trading volumes during the crash. At a glance, it seemed like activity was thriving. However, many traders found themselves unable to execute trades at the prices they saw on their screens. Order book depth vanished, spreads widened dramatically, and the liquidity that traders relied upon simply disappeared.
While trading volume shows activity levels, liquidity reflects the ability to execute meaningful trades without significant market impact. The October crash proved how misleading volume metrics alone can be when assessing an exchange’s execution quality.
Why Volume Isn’t the Full Story
For years, trading volume has been used as a benchmark for exchange quality, but this metric often masks underlying issues. Studies indicate that 70% to 95% of reported volume on some unregulated exchanges comes from wash trading—fake transactions designed to inflate numbers.
Even on legitimate platforms, headline volume doesn’t guarantee real liquidity. When perpetual futures volume remained high during the October event, executable depth collapsed by over 98%. Traders realized that high volumes don’t equate to robust and accessible liquidity.
Key Liquidity Metrics to Watch
Rather than relying solely on trading volume, traders should consider the following metrics to assess an exchange:
- Order Book Depth: This measures how much volume is available to trade near the mid-price without impacting the market. Depth is critical during both calm and volatile conditions.
- Spread Stability: Spreads indicate the gap between the bid and ask price. During stress scenarios, spreads widen significantly if market makers step back.
- Slippage: This combines spread and missing depth, showing the real price difference traders experience during execution.
In the October event, these factors explained why some exchanges failed while others thrived. Specific platforms saw spreads widen over 1,200 times their normal range, leaving traders with exorbitant costs and unmet trades.
Centralized vs. Decentralized Liquidity
Crypto liquidity remains fragmented. Approximately 80% of liquidity resides on centralized exchanges (CEXs), while the rest is spread across decentralized protocols (DEXs). However, liquidity on paper doesn’t always translate to availability. During periods of high stress, even exchanges with high trading volume can see their liquidity dry up if market makers pull back.
How Phemex Provides Liquidity Stability
A standout example of addressing these challenges is the Phemex Retail Price Improvement (RPI) system. Designed to ensure liquidity in moments of volatility, this system separates retail traders’ flow from high-frequency algorithms. By doing so, liquidity providers can offer tighter spreads without the fear of being exploited by faster traders.
After recent upgrades in December 2025, Phemex achieved industry-leading performance, providing meaningful depth within ±0.1% of mid-price even amid volatile conditions.
Smart Tips for Crypto Traders
To navigate these fragmented markets, traders should:
- Focus on exchanges with verified Proof of Reserves
- Examine depth, spreads, and slippage during recent volatility
- Prioritize platforms known for staying liquid in high-stress scenarios
For those who want stability and superior execution quality, tools like Phemex RPI can make a significant difference (see Phemex here).
The Lesson Learned
The October liquidation event wiped out $19 billion in leveraged positions, but it left traders with a stark lesson in liquidity. High trading volume may catch your attention, but liquidity metrics like depth, spread behavior, and slippage reveal the true state of a market. For exchanges, the focus must shift from flashy marketing to building robust execution infrastructure. For traders, staying informed and choosing platforms built for stability can make all the difference in a rapidly fluctuating market.
Ready to make smarter crypto trading decisions? Understanding liquidity is your first step.
