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FX Market Structure 101 - Liquidity

Education - Milan Cutkovic | 05 Aug 2015

The foreign exchange market is the biggest one in the world, with a daily turnover of $5.3 trillion per day, according to the latest data from the Bank of International Settlements. Currencies are traded over-the-counter, which means that there is no centralized location where all of the trading occurs, like for example the New York Stock Exchange (NYSE), but rather a network of liquidity providers. Trading is done 24/5 in various locations all over the world. Each trading week starts on Monday morning in New Zealand and ends on Friday evening in New York City. 

The FX market can be seperated in different "tiers" or "levels". The core of the market is the interbank market, where banks, the main liquidity providers in FX, trade with each other. The top banks by market share are Citibank, Deutsche Bank, Barclays, UBS, HSBC and JP Morgan. While there are many banks offering FX dealing services, the top dealing banks make up almost 50 % of the FX market. The traders at the banks who provide liquidity to their customers are called dealers. Most of FX trading was done by telephone until the appeareance of electronic trading platforms. Today, most trading is done through the e-platforms and there is less need for calling a dealer. They are usually required for larger orders or for trading in exotic currencies, that may not have sufficient liquidity. This trend is very likely to continue in the future. 

Liquidity itself depends on the currencies involved and the time. Liquidity is generally not a problem in pairs with high turnover, like EUR/USD or GBP/USD. However, if it involves exotic currencies like the Mexican Peso or Russian Rouble, liquidity can be poor and volatility hence much higher. It also depends on the time or currency-specific events. For example, the New Zealand Dollar has usually solid liquidity during the Asian session, but this may not be the case during the US trading session. Further, national holidays can significantly impact the liquidity of the specific currency, as the local banks will be closed.

Hence, it is not possible to answer the question "What trading size is needed to move the markets?" with certainty. It depends on the above mentioned factors. A 100 million EUR/USD buy order might not move markets much if executed during the London session and a normal trading day, but could have a much larger impact if executed between the US and Asian trading session, where liquidity is rather poor.

One of the most important things for a retail FX broker are the liquidity providers. AxiTrader works with several of the leading FX liquidity providers - such as Citibank, Goldman Sachs, JP Morgan and UBS - which is why we are able to offers our customers low spreads and excellent liquidity.


Contributed by Milan Cutkovic


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