What is a Thin Market?
The opposite of a liquid market, a thin market is characterized by a small number of participants and high price volatility.
How Does a Thin Market Work?
The small number of buyers and sellers in a thin market results in low transaction volume and relative illiquidity. Though low in volume, transactions tend to be larger. For this reason, price movements in a thin market are inherently more volatile. In addition, there is a generally wider spread between asset bid and ask prices as market actors attempt to profit from fewer transactions. A thin market should not be confused with a liquid market, which is characterized by a high volume of buyers and sellers, high liquidity, and relatively lower price volatility.
Why Does a Thin Market Matter?
Participants in a thin market need to have the financial resources to effectively absorb sudden price shocks associated with high volatility. This means that the associated risk may work in market participants' favor and result in sudden gains.