Rapid compression of top-of-book depth and widening execution slippage

Why it matters for DUSK:

Lower liquidity resilience increases the chance of outsized moves on moderate sell pressure, leading to cascade effects as stop loss levels and derivative liquidations trigger further selling.

Monitoring steps:

• Collect orderbook snapshots from primary DUSK pairs across top exchanges and compute depth at standardized notional sizes (e.g., $10k, $50k, $100k).
• Track rolling percent change in depth and average slippage for market orders executed through time-weighted sampling.
• Watch for widening bid-ask spreads and divergence between exchange-provided depth and actual execution slippage.
• Combine with funding rates and open interest:

If slippage worsens while funding moves negative (shorts pay) and open interest rises, liquidity stress is likely.

Actionability:

Treat rapid top-of-book compression as a bearish liquidity stress signal—reduce market order usage, widen execution limits, or temporarily hedge directional exposure.

Conversely, extreme compression can also produce short-term squeezes if buy demand appears, so pair with flow and sentiment checks.

Caveats:

Temporary depth compression can result from scheduled maintenance, exchange outages, or large OTC trades being settled off-exchange; always check for operational explanations.

Also, thin secondary venues can bias aggregated measures—focus on primary liquidity venues when possible.