Which of the following describes a typical illiquid asset's trading characteristics?

• A. High trading frequency and narrow spreads.
• B. Low trading frequency leading to wider spreads.
• C. High liquidity and fast price discovery.
• D. Stability with no price movement.

Answer: (B)

Illiquid assets are characterized by infrequent trades, so there are fewer orders to match. That thin trading activity makes each trade harder to execute and typically leads market makers to widen the bid-ask spread to compensate for the higher risk and potential inventory costs. In short, low trading frequency goes hand in hand with wider spreads in illiquid markets.

The other descriptions describe scenarios more common in liquid markets: frequent trading with tight spreads, quick price discovery, or a market where prices barely move. While those traits can exist in liquid markets, they don’t align with how illiquid assets behave, where activity is sparse and costs to trade are higher due to wider spreads.