Which statement is true about liquidity's relationship to price level changes?

• A. Liquidity acts as a magnet for price
• B. Liquidity prevents any price movement
• C. Liquidity guarantees equal prices across venues
• D. Liquidity is unrelated to price

Answer: (C)

The main idea is that liquidity affects how price responds to trades and how prices stay in line across different places where assets are traded. When a market is liquid, it’s easy to buy or sell without pushing the price much. If prices diverge between venues, traders will buy on the cheaper venue and sell on the pricier one, using the abundant counterparties available. This arbitrage activity, enabled by good liquidity, tends to bring prices to parity across venues. So the statement that liquidity guarantees equal prices across venues best reflects how liquidity facilitates alignment of price levels. The other ideas don’t fit because liquidity does not prevent all price movement, it doesn’t serve as a magnet for price, and it’s not unrelated to price movements.