Definition
Liquidity is the ability to transact a meaningful quantity promptly near prevailing prices without causing a disproportionate price change in the wider market.
In market context
Liquid markets generally have competing quotes, narrow spreads, available depth, and frequent transactions, but those conditions can disappear during stress. Liquidity depends on instrument, venue, size, time, and direction, so a small displayed quote may not support a large order. Illiquidity increases slippage, partial-fill risk, valuation uncertainty, and the chance that a position cannot be exited when intended under stress.
Risk context
Liquidity observed in normal conditions may not be available when many participants seek the same exit.
Source
Use the primary source for fuller regulatory or market context.