In trading, liquidity represents the “depth” of the market, i.e the volume of the working (currently active) limit orders on a platform within a narrow range around the market price. To put it simply, you can add 0.5% to and subtract 0.5% from the market price, and the value of all limit orders falling into this price range will represent liquidity.
Liquidity is important for a trading platform. Whenever a market order is placed on the platform, there needs to be enough “on the other side” to fulfill it. For example, a market Buy order first “eats” whatever is available at the lowest price, then goes to the next best price and so forth. Until the order is fully executed.
On a platform with a lot of liquidity, a market order of a decent size will be executed without a significant change from the price level at which it was placed (insignificant slippages). The opposite occurs on the platform with little liquidity.
On certain platforms, liquidity is supplied by the market participants. A good example is futures market.
On other platforms, liquidity is supplied by liquidity providers. CEX.IO Broker is the example of such a platform. In this case, the liquidity on the platform represents the combined liquidity of all providers together.
A liquid market lowers the cost of trading. Not only a trader avoids high slippages, the spreads also tend to be narrower when the liquidity is high.