What does the term "Tightness" in financial markets refer to?

The term "Tightness" in financial markets primarily refers to the bid-ask spread, which is a measure of market liquidity. A narrow bid-ask spread indicates a highly liquid market where there is a smaller difference between what buyers are willing to pay (the bid) and what sellers are asking for (the ask). This tightness suggests frequent trading activity and confident pricing, enabling investors to enter and exit positions without significant price concessions.

In contrast, a wider bid-ask spread signals lower liquidity and can result in higher transaction costs for traders, as they may face more substantial price differences between buying and selling. Therefore, the concept of tightness directly relates to how easily assets can be traded in the market and the overall efficiency of the pricing mechanism.