[washedup]

Liquidity directly relates to the number of participants (or quotes) in a market place. Let's think about a simple market, where the price of a good can go from 1 to 10 dollars. One person is looking to sell the good for $8, while another person is looking to buy at $2. The market currently has a bid-offer spread of $6. With only two participants in this market place, they will have to meet somewhere in the middle, or never trade. The seller will lose value because he has to sell at a lower price, while the buyer will lose money by paying more. However, if there were more participants in the market place, all with different ideas about how valuable the good is, the buyer is more likely to get their $2 price while the seller is more likely to get their $8 price. For example, if a new seller joins the market at a price of $6, the person looking to buy can now do so at a cheaper price.

Basically, with more participants, the bid-offer spread will begin to close, and trading will occur at more prices.