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Watch full video here: How to GET PAID to Trade with a Market Liquidity Strategy

If you’re an active trader like me, liquidity is something you feel before you define. It’s what makes the difference between getting in and out of a trade clean or getting stuck watching slippage eat your profits. Liquidity might seem invisible, but I promise that when it’s missing, you’ll know.

In this article, I’m going to walk you through exactly what liquidity is in trading, why it matters, and how it affects every single order you place. I’ll break down how exchanges use rebates to incentivize liquidity, how market makers profit from spreads, and why some brokers reward you — and others don’t.

What Is Liquidity in Trading?

Let’s start with the basics so we’re on the same page.

Liquidity Means Opportunity

Liquidity refers to the presence of other traders in the market. If I want to buy shares, someone has to be there to sell to me. That seller’s order is what adds liquidity. Flip it around — if I want to sell, I need a buyer. That buyer adds liquidity.

What Happens in an Illiquid Market

Now let’s look at the opposite side of the spectrum.

A liquid market means I can get in and out quickly. The spreads between the bid and ask are tight, and the order book has depth. That’s ideal. But in an illiquid market — like what you often see with penny stocks — there just aren’t enough participants. The spreads get wide, and trying to fill an order at a decent price becomes frustrating.

When a market is illiquid, I end up either waiting forever to get filled or paying up just to get in. That creates slippage, and slippage kills good trades.

Illiquid markets can be very difficult to trade. Active traders want more liquidity; we want to be able to get in and get out quickly. So, the more traders there are, the more liquidity there is, and the easier it becomes to trade.

Why Liquidity Matters for Day Traders

Here’s where it becomes especially critical for traders like me.

Fast Execution Is Everything

As a day trader, my whole strategy is built around fast entries and exits. I need to be nimble. Liquidity lets me scale into and out of trades without massive price movement. If there’s not enough liquidity, even a modest order can push the price away from me.

One moment that drove this point home was when I bought 250 shares at $9.40 and tried to sell at $9.41. My order sat there, unfilled. The market didn’t budge. Eventually, I clicked the $9.40 bid, sold instantly, and moved on. That right there is the difference between adding and taking liquidity, and how quickly a trade can go sideways.

Liquidity Reduces Slippage and Spread Risk

I’ve been burned before. I’ve hit the buy button, and before my order even finishes filling, the price has jumped a few cents. That’s how I learned that liquidity isn’t just a bonus — it’s a requirement.

More liquidity means:

  • Tighter spreads
  • Less slippage
  • Better fills
  • More reliable trade setups

If I’m scalping for a few cents, those things matter. A liquid stock lets me focus on the setup, not the execution headache.

Adding vs. Taking Liquidity: What’s the Difference?

Let me explain the two fundamental roles traders can play.

There are two roles every trader can play: you either add liquidity or take it. If I place a limit order and let it sit on the book, I’m adding liquidity. If I use a market order — or hit the bid or the ask — I’m taking liquidity.

Adding liquidity helps the market. I’m putting an order out there for someone else to hit. Taking liquidity does the opposite, removing that order from the book.

Here’s how I think about it:

  • Adding = I post a limit order and wait
  • Taking = I hit someone else’s order and get filled immediately

The benefit of adding liquidity? You can get paid to do it.

How Market Makers Profit From Liquidity (Arbitrage)

Market makers are like the dealers at a poker table. They sit on both sides of the trade. They post a buy order on the bid and a sell order on the ask at the same time. They’re licensed to do this, and they profit from the spread.

Let’s say I sell 1,000 shares to a market maker at $10. They turn around and sell those same shares a few minutes later at $10.25. They just made $250. That’s arbitrage. They didn’t need a fancy setup. They just had to wait for the next buyer to show up.

And get this: they’re the ones creating the spread to begin with. In a sense, they shape the very price action we’re trying to trade.

A Quick History of Liquidity and Market Infrastructure

Let’s take a brief look at how things evolved.

From Floor Trading to Electronic Quotes

Back in the 1920s, market makers stood on the floor of the exchange. If your great-grandparents wanted to buy shares of GE, they’d call a broker. That broker called their trader. The trader would walk over to a market maker on the floor, execute the trade, and bring the shares back.

How SOES Changed the Game

Today, it’s all electronic. But that change didn’t happen overnight. After the 1987 crash, NASDAQ launched the Small Order Execution System (SOES), which forced market makers to maintain electronic quotes.

This was the requirement after the flash crash: all market makers had to maintain an electronic bid. That opened the door for traders like me to route orders electronically and eventually, to trade against those same market makers.

That’s when online trading was born. At firms like Datek, traders realized they could catch stale quotes from market makers, buy shares at an outdated price, then flip them instantly for a quick profit. That’s where the idea of playing the market maker’s game began.

The Maker-Taker Fee Model Explained

Here’s where things get interesting if you’re tracking every cent.

Once brokers realized they could match orders internally, they built their own mini exchanges. If I placed a buy order and another customer placed a sell, the broker matched them directly. No need to send it to NASDAQ.

To encourage this, brokers created the maker-taker fee model. If I added liquidity, they paid me a rebate. If I took liquidity, they charged me a fee.

Making Money With Rebates

Now let’s talk about how this puts money in your pocket.

I’ve placed trades where I made money just from the rebates. I’d post on the bid, get filled, sell on the ask, and even if the stock didn’t move, I still pocketed a few bucks.

  • Add liquidity = Get paid (rebate)
  • Take liquidity = Pay fee

It’s a small amount — like $0.002 per share — but when you’re trading size, it adds up fast.

How Different Brokers Handle Liquidity and Rebates

It’s important to know how your broker treats these fees.

Not All Brokers Share Rebates

Not all brokers treat liquidity the same. Some, like Lightspeed, pass those rebates on to me. Others — especially commission-free brokers — keep that money for themselves.

Free Trades Come With a Catch

That’s how they can offer free trades. They sell my order flow to market makers, who then profit from it. It’s called payment for order flow, and while it sounds like a good deal, there’s a trade-off: execution speed.

I’ll gladly pay $2 per trade with a direct access broker if it means I get the best price. Speed and reliability matter more to me than zero commissions.

The Limits of Retail Traders: Why We Can’t Be Market Makers

Here’s what separates retail traders like me from institutional ones.

Sometimes people ask me, “Why don’t you just act like a market maker?” Here’s why: retail traders like us don’t have the tech, the speed, or the order flow visibility.

Market makers use ultra-fast algorithms and massive infrastructure to sit on both the bid and ask, constantly adjusting their prices. We can’t do that. I can post a bid or an ask, but not both at once. And if I try to flip fast? I get rejected for crossing orders.

Retail traders just aren’t built to do what market makers do. But that doesn’t mean we can’t benefit from understanding their playbook.

Case Study: Trading ENVO With High Liquidity

Let’s look at a real-world example of liquidity in action.

Let me give you a real example. I was trading ENVO—a stock with nearly 300 million shares of volume on the day. That’s peak liquidity. I could buy 10,000 shares on the bid, then turn around and sell them on the ask within seconds.

Making Rebates Work on a Liquid Stock

Here’s how it played out during that trade. Tight spreads, instant fills. That’s the dream.

I did a 5,000-share trade, added liquidity on both sides, and even though the price didn’t move, I still made $20 in rebates. Imagine doing that a hundred times a day. That’s what market makers do.

Conclusion: Mastering Liquidity for Smarter Trading

Liquidity isn’t just a technical term — it’s the pulse of every trade I take. Whether I’m scalping for pennies or holding for a bigger move, I need other traders in the market. I need tight spreads, deep books, and fast execution.

Understanding how liquidity works has made me a better trader. It’s helped me choose better brokers, smarter order types, and avoid unnecessary slippage.

Liquidity might be invisible, but once you understand it, you’ll never trade the same way again.

Want to learn how to master execution and read market structure like a pro? Join me inside Warrior Trading, and I’ll show you the trading tools and tactics I use every single day.