Fake Liquidity: The Empty Promise That's Costing You Money

An exchange boasts "deep liquidity!" Traders flock to it, hoping for smooth, efficient trades. But then, orders slip, prices swing wildly, and frustration mounts.

The problem? Fake liquidity. And there are ways to discover which crypto exchanges offer real liquidity, and which don’t.

Key Takeaways

• Fake liquidity is an illusion orders appear in the book but vanish when you try to trade.
   
• Spoofing, layering, and wash trading are common tactics used to fake market depth.
   
• Slippage and wild price swings are often symptoms of low or fake liquidity.
   
• Exchanges may inflate volume stats to seem busier and more liquid than they really are.
   
• Ouinex offers genuine liquidity with real market makers, visible slippage, and no BS.
   

What Is Fake Liquidity?

Imagine an order book stacked with big buy/sell orders. But once you place your order, poof! That liquidity disappears faster than your ex’s promise to “stay friends.”

Basically, it’s the illusion of orders…not the real deal. 

How Is Fake Liquidity Created?

• Spoofing: Placing big orders with no intention of filling them (to trick traders into thinking the market is going in one direction or the other).
   
• Layering: Same as spoofing but with multiple orders at different prices.
   
• Phantom Orders: From bots that pull out just before your trade hits.
   
• Wash Trading: Artificially inflating trading volume by repeatedly buying and selling the same asset (i.e. you selling yourself the same asset over and over again, or a group of traders selling back and forth to one another).   
   
• Bots: Using automated programs to create fake orders and volume.
   
• Inflated Numbers: Simply reporting higher volume than actually exists.
   

Why is Fake Liquidity a Problem?

Fake liquidity distorts market depth and gives traders a false sense of security. You may get slippage, poor fills, or worse walk into a trap if it occurs due to spoofing or layering.

• Slippage: It leads to high slippage, as large orders (and sometimes smaller ones) can't be filled at the expected price. (Slippage is when you get a different price than the one you clicked to execute at…basically the market moves in between when you click to order and the order is executed).
   
• Volatility: It causes price instability and unpredictable swings.
   
• Manipulation: It makes the market vulnerable to manipulation.
   

How to Spot Fake Liquidity

Your best bet before you trade is to:

• Always check actual trade volumes, not just order book size.
   
• Look for sudden cancellations when price approaches a large order.
   

Ouinex’s Approach to Liquidity 

Ouinex prioritizes genuine liquidity:

• No-CLOB Model: Our execution model attracts serious market makers, providing real depth to the order book. 
   
• Institutions Can Only Make Prices: Meaning they can’t sell to themselves.
   
• Transparent Volume: We believe in honest reporting of trading activity.
   
• You See Slippage Up Front: If we had fake liquidity, it would reflect in the slippage, which you can see in real-time as you trade. 
   

When we say we’re transparent and believe in a no BS approach to trading, we mean it. 

FAQs

What exactly is fake liquidity?

Fake liquidity is when an exchange or traders make it look like there are lots of orders ready to be filled but those orders are often pulled or never intended to execute. It’s like seeing a packed restaurant in a photo on Google Maps, only to show up and realize it’s full of mannequins.

Why do exchanges fake liquidity?

To attract users. High liquidity makes a platform look credible and efficient. When traders believe they can enter and exit trades easily with minimal slippage, they’re more likely to use that platform. But when that liquidity is fake, it leads to poor execution and lost trust.

How can I tell if an exchange has fake liquidity?

Watch for large orders that disappear just as the price gets close. Also, compare claimed trading volume with actual trades happening on-chain or via third-party aggregators. Sudden volume spikes with no news that would lead to this? Red flag.

What’s the risk of trading on an exchange with fake liquidity?

You risk slippage thanks to delayed execution. If there’s spoofing or layering happening, it’s market manipulation and it will work against you.

You can learn more about slippage here. 

And if you want to know all about spoofing, check this out. 

How does Ouinex prevent fake liquidity?

We don’t let institutions or market makers execute trades against themselves (no wash trading) as they can only post prices not take liquidity. We’ve also banned spoofing.

Plus, as you can see the estimated slippage in real-time as you trade, you know if there is real liquidity if there wasn’t, the slippage would be awful! And it’s not. We have minimal slippage.