How does transaction volume generally affect liquidity in the market?

Higher transaction volumes generally increase liquidity in the market because they facilitate a greater number of buy and sell orders, which leads to more efficient price discovery and a tighter bid-ask spread. When there are many transactions occurring, there are more participants in the market, allowing assets to be bought and sold more easily without causing significant price fluctuations. This increased level of activity ensures that there are sufficient counterparties for trades, making it easier for investors to enter or exit positions without affecting the asset's price dramatically.

As trading volume rises, the market becomes more capable of absorbing orders, leading to a healthier trading environment characterized by faster execution times and reduced likelihood of slippage, where the price moves unfavorably before an order is completed. Overall, a robust transaction volume is a key indicator of market liquidity, reinforcing the idea that markets with higher volumes are generally more liquid.