Financial market liquidity decreases with price volatility and trading imbalances.
The bid-ask spread in financial markets is influenced by asset price variability, order flow volatility, and market-maker inventory size. As these factors increase, the bid-ask spread widens to cover market-makers' costs, leading to lower market liquidity. This means that during times of high price fluctuations and imbalanced trading, market liquidity decreases due to larger bid-ask spreads.