When Liquidity Dried Up — The True Story Behind the Oct 10 Crash█ We Actually Saw It Coming
There were clear signs of potential reversals across major markets before the Friday, October 10, 2025 crash. You can see it in the liquidity heatmaps: Gold, Bitcoin, S&P, and other futures all trading above their top 10 liquidity levels.
When that happens, it’s usually a warning flag. Price is moving into areas with less visible liquidity, meaning fewer resting orders available to absorb aggressive buyers. That’s when the market becomes fragile and doesn’t take much to trigger a sharp reversal.
█ When Price Trades Beyond Visible Liquidity
It’s easy to think big moves happen just because of news, but beneath the surface, microstructure signals often show when markets are already vulnerable.
One of the clearest is when the mid-price extends beyond the visible liquidity, above the top few ask levels or below the top few bid levels in the order book.
Suppose price pushes beyond the visible top levels. In that case, it often means that liquidity was consumed faster than it could replenish, either because aggressive orders cleared it out, or market makers pulled their quotes. That’s when we get what’s called a liquidity vacuum.
Research from the Federal Reserve, Bank for International Settlements, and academic studies (Lo & Hall, 2014; Meldrum & Sokolinskiy, 2025) all point to the same thing:
When order book depth is shallow, markets become more fragile. Prices overreact, spreads widen, and shocks travel faster.
█ What the Heatmap Really Shows
Those heatmaps are a visual snapshot of this structure.
The green and red bands show the depth of buy and sell orders — the liquidity zones.
The blue line is the mid-price — the true current market price.
When the blue line (mid-price) moves above the red zone, it means price has traded beyond the top available asks. That can happen because:
Buyers lifted all nearby sell orders (aggressive buying), or
Sellers pulled liquidity (passive withdrawal).
In both cases, the effect is the same, the book thins out, and volatility risk increases.
Heatmaps don’t show everything though. They don’t reveal:
Hidden or iceberg orders deeper in the book,
Off-exchange liquidity or block trades,
Or how quickly the book replenishes in real time.
But as a visual proxy, they’re incredibly useful for spotting moments when price runs ahead of available liquidity, often right before sharp reversals.
█ Why the Crash Hit So Hard
So while the crash came from unexpected news, the speed of that drop wasn’t random. Markets were already fragile. Liquidity across assets was thin. When the shock hit, there weren’t enough resting orders to slow it down.
Gold, Bitcoin, and S&P futures all had their mid-prices trading above visible liquidity, making them more sensitive to aggressive selling; that’s why the market fell almost simultaneously and so fast.
█ How I Handle These Setups
Whenever I see price trading above visible liquidity, I start managing risk differently. I might keep existing longs, but I won’t add new ones. Instead, I scale out gradually and watch for potential short setups if other signals confirm it.
It’s not about predicting crashes, it’s about recognizing when the market’s structure is fragile.
█ Quick Takeaway
When the mid-price trades above visible liquidity, the order book is telling you something simple but powerful:
“There’s not much support up here.”
That’s often when it pays to get defensive, not aggressive.
Access the CME Liquidity tool at this link
-----------------
Disclaimer
The content provided in my scripts, indicators, ideas, algorithms, and systems is for educational and informational purposes only. It does not constitute financial advice, investment recommendations, or a solicitation to buy or sell any financial instruments. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.
All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs.
