Hello, dear friends! Almost everyone who has traded at least a little on the stock exchange has heard about Forex liquidity, but not many know what liquidity is and who the liquidity providers are. Today you will finally learn what liquidity is, why you should be wary of low market liquidity, what is the difference between liquidity and volatility, which are the most liquid, as well as who the liquidity providers are and why they are so important when choosing a broker.
If you have not yet found a reliable broker, then we offer you an honest and independent rating of Forex brokers.
What is liquidity?
Liquidity in Latin (liquidus) means “flowing.” In the world of finance, liquidity refers to the ability of assets to be quickly exchanged for money. The faster the exchange occurs, the more liquid the asset. In accounting, the most liquid assets are money and securities, and illiquid assets are buildings, structures, equipment, that is, what is more difficult to sell. If you have the latest generation smartphone, then the likelihood that it will be bought at the price at which you bought it in the store is much greater than if you want to sell an old bicycle that is gathering dust on your balcony. Thus, a smartphone is a more liquid asset than a bicycle, that is, liquidity is primarily affected by supply and demand. Returning to the foreign exchange market, it can be noted that the presence of a large number of buyers and sellers indicates high liquidity of the market. At the same time, it is one of the most liquid markets. Daily Forex trading volumes amount to up to $5 trillion, and according to some experts, by 2020 the daily turnover could exceed $10 trillion. Another factor that makes Forex a highly liquid market is the need for constant currency exchange. At the same time, the largest volume of trading operations (over 70%) falls on currency pairs with the US dollar.
What are the benefits of high liquidity for a trader?
We have a little understanding of the concept of liquidity, but why a trader needs it, and how it can be useful in trading, may not be entirely clear to many. There is an old anecdote about a trader who saw the shares of a little-known company fall to the limit. Then he called his broker and told him to buy 100 shares of this company. The next day the shares rose several points, then he decided to buy another hundred shares. On the third day, when the shares had risen in price a little more, he called the broker and told him to sell the shares. "To whom?" – this was the broker’s answer. This is where market liquidity lies. If you bought assets on a low-liquid market, then be prepared for the fact that it will take a long time for them to be bought back from you at the price at which you would like to sell. Of course, Forex is a highly liquid market, but there are still trading instruments with low liquidity, this becomes especially noticeable when you operate in large volumes. For example, you want to buy 10 lots at a price of 0.76237, but in the order book there is only an order of 2.5 lots at this price. So you first buy 2.5 lots at a price of 0.76237, then 2.5 lots at a price of 0.76238 and the remaining 5 lots at a price of 0.76239.
If you trade in a market with high liquidity, then you get the best prices from liquidity providers (we'll talk about them later), low, high order processing speed (no requotes), low probability of slippage and a smoother chart without price gaps (). Works better in liquid markets, and.
Liquidity and volatility
Many traders confuse the concept of liquidity with. However, the market can be both liquid and low-volatility. Let us recall that volatility shows the variability of price per unit of time. Spikes in volatility indicate a sharp change in price dynamics. Liquidity is responsible for price smoothing. An excellent example of a low-liquidity market is the following figure, which shows gaps and jumps in the flow of quotes.
When news is released on such a market, the price begins to fluctuate in different directions, this is due to the lack of liquidity providers in the market. In turn, liquidity serves as a kind of buffer that absorbs weak price fluctuations, resulting in a smoother chart.
Liquidity and trading sessions
As you know, the Forex trading day is divided into trading sessions, which is due to differences in time zones and trading times on currency exchanges. The greatest liquidity is observed during the London trading session and the beginning of the American session. During the Asian session, market liquidity decreases and almost completely subsides during the Pacific trading session. But this does not mean that the market is becoming absolutely calm. During times of decreased liquidity, the Forex market becomes more vulnerable to volatile market movements that cause sharp price spikes. Therefore, it is not recommended to trade during the Asian and Pacific trading sessions, due to the unpredictability of the market. Also, low liquidity is observed during official public holidays in the United States, Christmas holidays and during the summer holidays.
Liquidity of currency pairs
The most liquid currency pair is EURUSD, whose share on Forex accounts for more than 20%. This is understandable, since EURUSD is considered the most popular currency pair, and its pricing depends on the strongest economies in the world - the USA and the EU. Even during news releases, EURUSD continues to retain the properties of a highly liquid currency pair. USDJPY is the second most liquid currency pair, with a share of 17%. This is because the JPY currency is the most traded currency in the Asian market and ranks third in terms of trade turnover in the world after the US dollar and the euro. In third place in terms of liquidity of currency pairs is GBPUSD (11%). As you know, London is the largest financial center of the entire business world, and the British pound sterling ranks fourth in circulation and is also a reserve currency in many Central Banks due to its high liquidity and stability of the UK economy. The remaining liquid currency pairs are presented in the figure below.
What is the danger of low liquidity in the foreign exchange market?
When trading in a low-liquid market, you need to know what dangers await you. Basically, they are all associated with deteriorating trading conditions:
- Spread widening. If there are a sufficient number of orders in the order book, the spread approaches zero. But as liquidity decreases, the number of orders decreases and the spread widens. This is why it is not recommended to trade on holidays and during news releases - due to a decrease in the liquidity of the foreign exchange market;
- Slippage. Low liquidity also increases the likelihood of slippage when trades are executed at a different price. Slippages occur during triggers, stop losses or take profits. Slippages can be positive (in the case of take profits) and negative (in the case of stop losses). For example, you set a stop loss of $10, but during the release of important news, liquidity decreased and the transaction was closed with slippage not in your favor, as a result of which you lost $30 instead of the stated $10;
- Gaps. Another negative aspect associated with low liquidity is price gaps. This happens when there is a difference of at least 1 point between a sequence of consecutive quotes. Gaps can also be in your favor or against you.
Who are liquidity providers and where do quotes come from?
Forex quotes are a controversial issue among traders – where do they come from and why can quotes differ from person to person? Let's try to answer these questions. Quotes are received from liquidity providers through a special Currenex program (Integral and others), which serves as a bridge between liquidity providers and the trading terminal. Liquidity providers (or liquidity providers) are international banks, hedge funds and large brokers. The Currenex program broadcasts quotes from over 70 different liquidity providers, but this does not mean that all of them do this automatically. Quotes will only come from those liquidity providers with whom the broker has entered into an agreement.
Why do we need Forex liquidity providers? Let's say you want to buy 10 lots, for this someone needs to sell them. The broker can block them with counter orders of the same trades as you. But if the volume is too large, then the broker may not have enough funds of his own, and he will bring your application to the interbank market, since large banks will definitely have the amount to satisfy your application. The more liquidity providers a broker has connected, the better prices and narrower spreads will be, and the faster your orders will be executed. It should be noted that this only applies to trading accounts using ECN/STP technology.
Since the Forex market is not an exchange market, but an interbank market, and brokers work with various liquidity providers, quotes may differ by 5-10 points, and in case of sudden movements, even more. This is the norm and a completely natural phenomenon.
See also who they are and what their advantages are.
List of liquidity providers
We have prepared a list of the most popular liquidity providers especially for you:
- Bank of America;
- Barclays;
- Baxter-FX;
- Citibank;
- CitiFX;
- DBFX;
- Deutsche Bank;
- Dresdner Bank;
- Ducas Bank;
- Dukascopy;
- EBS-Icap;
- FXall;
- FFastFill;
- GFT Forex;
- Goldman;
- Hotspot;
- HSBC;
- JDFX;
- JPMorgan;
- IFX Markets;
- LavaFX;
- Liquidus;
- MBTrading;
- Merrill Lynch;
- Morgan Stanley;
- Nomura Bank;
- Saxo Bank;
- Scandi Bank and many others.
Which liquidity providers do popular brokers work with?
This information is not so easy to obtain, since few brokers publish information about liquidity providers on their website, although in our opinion this information should be as accessible and transparent as possible. In the course of lengthy correspondence with technical support managers, it was eventually found out which liquidity providers the brokers cooperate with:
- FXOpen – Bank of America, Barclays Capital, CITI, CRNX, Deutsche Bank AG, Dresdner, GOLDMAN, HOTSPOT INST, JPMorgan, LavaFX, Morgan Stanley, RBS, SG Paris, Standard Chartered, UBS;
- FxPro – Barclays, Bank of America, RBS;
- Forex4you – Exante, Interactive Brokers;
- EXNESS – FXCMPRO, ADS Securities;
- AMarkets – xOpen Hub.
Pay attention to which liquidity providers a broker works with before you start trading with them. Profitable trading to you!
Sometimes in articles published on the website, such a concept as Forex liquidity. For example, in the recent news New metals on accounts in RoboForex, we talked about how this company added a new liquidity provider, and therefore trading conditions for currency pairs improved, in particular, the spread decreased.
What is liquidity?, who are they liquidity providers Forex and why do they affect trading conditions on the exchange? If you are interested in these questions, we will try to answer them. So, liquidity is one of the important concepts in the financial world. The term has Latin roots: Liquidus - translated from Latin means “flowing,” that is, liquid. How can this term be applied to the world of finance? In our case, we are talking about money, about its movement.
Liquidity is understood as the possibility of any object for quick sale, that is, to a quick exchange for money.
The faster something can be exchanged for money, the more liquid it is. The longer it takes to exchange an object for money, or its final price is significantly lower than the initial one, then such an object is classified as illiquid or low-liquid.
In the balance sheet, all assets are divided into groups according to their degree of liquidity. The most illiquid ones are buildings, structures and equipment that are not so easy to sell, and it takes time. The most liquid assets are securities and cash. It is not surprising that it will also be considered the most liquid - after all, here money very quickly flows into money, and in huge volumes, reaching several trillion dollars a day. This is many times greater than the trading volumes on the stock and other types of markets.
What is the reason for such a frantic turnover on the currency exchange? And it is connected with trading volume indicators. A large number of sellers and buyers create constant supply and demand in the market, maintaining its liquidity. There is always a buyer. And this phenomenon can be seen in the so-called depth of market, which displays the number of orders for the purchase and sale of a specific instrument at the current moment and at a certain price. The principle of its operation allows us to understand the reasons for the high liquidity of instruments. Below is a screenshot with an example of such a glass:
Rice. 1. Example of Depth of Market for the EURUSD pair.
The central column displays prices that are current at the current time for the selected pair. In the block above the horizontal line (pink color) - sell orders present on the market, in the blue block - buy orders. The left column is information about the volume of orders. In the right column you can leave a request to buy or sell an instrument at the price you are interested in.
After deciding to make a transaction to buy or sell at the current price, he makes it at the most favorable rate. This value in the price order book is located at the horizontal line (the farther from the line, the less favorable the price). For example, a trader sells 15 lots and his request is processed at a price of 1.09161. If there are fewer counter orders for purchase at this price, then another price at which there is demand will be used to cover the entire volume. It will be an order of magnitude higher, but the trader will still sell the entire volume of currency.
In the Forex market, the more popular it is, the more transactions are made on it, the more liquid it is considered. Its liquidity will depend on supply and demand, that is, how quickly a purchase/sale order will be covered by a counter one. The most liquid instruments are the pairs EUR/USD, GBP/USD, USD/CHF, XAU/USD, etc. EUR/USD accounts for about 25% of all transactions on the exchange. Such high popularity is explained by the fact that the dollar and euro are the most common currencies in international payments.
The second most popular pair is USD/JPY, accounting for 10-15% of all transactions made on the foreign exchange market. The demand for the instrument is due to active international trade, since due to the relatively low value of the yen, goods from Japan are competitive in price. GBP/USD accounts for 9-13% of the turnover, this is due to the fact that London is a major financial center, and therefore interest in its currency will be high.
The higher the liquidity of the pair, the lower it will be. The spread for the same instruments will differ from company to company. Therefore, when choosing a broker, you should pay special attention to the size of the spread they offer. It is worth considering that upon exit, the spread increases, traders lose interest in the instrument, and therefore its liquidity decreases.
Suppliers and liquidity providers.
The degree and speed of instrument liquidity also depends on the suppliers. They are presented in the form of world banks, various large funds with direct access to the foreign exchange market. Remember about the price glass - if you place a purchase order, someone must buy them. And if private traders do not want to buy it, then liquidity providers will do it, because they have such a volume of funds. Such transactions are carried out on Forex in the thousands and tens of thousands, and all of them must be covered by counter orders. And since the broker does not have such funds, and does not have the volume of counter orders from ordinary traders, he turns to liquidity providers, concluding agreements with them.
The quality of fulfillment of a trader’s requests will depend on Forex liquidity providers, and the more of them, the better, since there is confidence that requests will be processed quickly and at current, favorable prices.
Companies work with both suppliers and liquidity providers. The latter act as intermediaries between traders and suppliers. The provider combines many suppliers, which allows it to provide the best price to Forex brokers, and ultimately to traders. Liquidity providers include LMAX Exchange, Integral, etc.
Every self-respecting person provides access to information about Forex liquidity providers or providers with whom he cooperates. And if he enters into an agreement with a new counterparty, then one can count on improved trading conditions. Pay attention to this point when choosing a company so as not to encounter problems during your trading activities on the Forex currency market!
When analyzing various trading strategies, indicators, and Forex concepts, one cannot ignore liquidity in the market, since this is a key concept in the financial world, and in investments as well. Therefore, a separate article should be devoted to liquidity. That’s what we’ll talk about in this material. So, let's figure out what Forex liquidity is, who these Forex liquidity providers are, and why a trader needs them.
What is Forex market liquidity in simple words
The term " liquidus"(trans. liquid, flowing) belongs to the Latin language. But only here a completely logical question immediately arises: and what, in fact, can flow on the Forex market?
The answer, as always, is quite simple - money, of course. Based on this, liquidity can be called the process of quickly selling an object(taken literally - this is an opportunity to “flow” into currency).
Cash has the highest degree of liquidity. And of the world's trading platforms, Forex, of course, has the greatest liquidity. Forex volumes are indicators of the liquidity of various markets, which are summed up together. We can say that it is the various markets that provide Forex liquidity. Every day, trillions of dollars in volumes circulate in the Forex market. That is why the liquidity of the Forex market is the greatest. In Forex, you don’t have to worry about whether you have or don’t have a counterparty for any position, because the number of orders to buy/sell is simply unimaginably large.
What is called a highly liquid market?
Under the term « “highly liquid market” understand stable market transactions, where a large number and high volumes of transactions are “circulating” . In the Forex market, such transactions will be, first of all, currency. Because the smaller the difference between the buy/sell price, the higher the likelihood that you will “get rich” with the help of the market. And vice versa: when the gap in sales/purchase prices is too large, there is a considerable risk of complete financial failure.
This time, a single transaction in a highly liquid market is not capable of globally affecting the cost of a product. Because of this, it often happens that newcomers to the Forex market begin to believe the persuasion of Forex brokers that they are the liquidity providers. This, of course, is not entirely true. A Forex trader, having contacted a broker and invested his funds, begins to trade on Forex with unshakable confidence that his broker, even under the most unfavorable conditions, will carry out a transaction with the greatest benefit for the trader.
But in practice everything turns out differently. A trader, looking at his balance, simply does not understand How, with such high market liquidity as promised by the broker, does the deposit “melt away” so quickly? Therefore, it is at least unreasonable to say that a liquidity provider is a broker.
Who are Forex liquidity providers?
Those Forex brokers that work with direct transaction processing usually try to conduct their cooperation with many large liquidity providers. This will allow brokers to maintain their own liquidity and price indicators at the required level.
Most often, liquidity providers are banks or large financial organizations that trade foreign exchange instruments in huge quantities. In other words, such organizations manage “cosmic” amounts. So, most likely, a market player, selling his currency, will choose them when choosing a supplier. As a result, the purchase will also be made from a bank or organization.
Sometimes it happens that a broker can sell currency without transferring the transaction to liquidity providers. This means that when you make a purchase, you do so not from the seller to whom the transaction is directed by your broker, but from the broker himself. Such brokers are called “market makers”. Another name for them is counterparties.
Forex Liquidity – Market Makers
As mentioned above, the main “layer” of liquidity is provided by large players, or market makers. The more there are, the more likely it is that the transaction will be completed. And this will not depend on the trading session or time in any country. Due to high liquidity, Forex spreads fall, and hence trading costs. This is why everyone wants high liquidity so much.
Liquidity in Forex depends on the assets traded on the market, which can be either weakly liquid or highly liquid.
Highly liquid assets can be easily converted into money, but poorly liquid assets can be difficult to sell in a short time. Just today we will talk about what liquidity is in Forex and who its suppliers are.
Liquidity in Forex - what is it?
The term “liquidity” itself means the ability to quickly sell or buy a financial instrument at current prices.
The market is considered liquid when a certain number of trading participants (sellers/buyers) make assets liquid, allowing them to take monetary form in the shortest possible time. Of all the existing variety of markets, today it is considered the most liquid.
Today, the Forex market itself is already a highly liquid exchange, since the total daily turnover of money on transactions here exceeds five trillion US dollars. Liquidity on Forex depends on the number of transactions carried out on any currency pairs. The more transactions are concluded on them, the more liquid they are.
So the most liquid currency pairs are:
- EUR/USD
- USD/CHF
- GBP/USD
- XAU/USD and some others.
Liquidity in Forex is the highest because there are both buyers and sellers of currencies around the clock, and in large quantities. The currency market does not undergo sharp fluctuations even when strong crisis shocks occur, since money simply cannot take off and disappear - it will always be exchanged or bought. If one of the currencies in a pair depreciates, then the second will certainly rise in price.
Such a high level of liquidity on Forex is possible thanks to the ability to carry out transactions of any volume and direction almost instantly. What circumstances influence the liquidity of the Forex market?
What factors and financial structures influence the liquidity of the Forex market?
Liquidity in Forex is so high due to the following factors:
Firstly, a large number of participants, the majority of whom are government agencies that implement their monetary policy through the foreign exchange market.
Also, large trading participants include all kinds of commercial financial institutions, international banks, whose interbank activities greatly affect the liquidity of certain currencies, and, accordingly, on the market as a whole, other structures, the specifics of whose activities already border on an unlimited level of their own liquidity.
The second point is that liquidity in Forex depends on the round-the-clock functioning of the market, as well as the overlay of time. This circumstance makes it possible to carry out the necessary trading operations without taking into account borders and time zones.
Thirdly, the foreign exchange market operates with enormous volumes of money supply. (the cost of a single transaction), here are often hundreds of times higher than similar indicators on other markets and exchanges.
Well, fourthly, the product itself (money) traded on Forex already has 100% liquidity.
News video: Interbank market and Forex liquidity
Due to all of the above, when concluding transactions, he can always be confident in the operations he is conducting and not even think about who exactly will play the role of his counterparty. Increased liquidity on Forex is not only an advantage, but also the main prerogative of any investor. And Forex meets this requirement like no other market, which is why its popularity is growing every year.
Liquidity providers – who are they? And how their activities affect the Forex market
So, we have discussed what liquidity is in Forex, and here is who are its suppliers? As mentioned above, the number of applications for transactions on Forex is very huge and this makes it possible for its participants not to worry about the availability of counterparties.
Large banking structures, for example:
- "Deutsche Bank"
- largest Bank of America
- "Saxo Bank"
- "Citibank"
- investment funds,
- government agencies,
- large international corporations and the like.
They are the main link - liquidity providers of the Forex exchange.
These liquidity providers periodically turn to the foreign exchange market not only for reasons of currency speculation, but also for other purposes. For example, to purchase a certain amount of money in order to open a new branch in some country. Or one of the companies carries out currency exchange with another. Of course, in order to avoid risks, the second party to the transaction will contact the counterparty and make a certain transaction, which will guarantee his safety.
But at the same time, the counterparty does not want to be in the red and will turn (derivatives of the simplest instruments tied to the financial market).
Even from the examples given, it is clear that companies, when making regular exchanges, lead to a whole series of transactions that make the initial exchange amount a much larger amount, which makes the foreign exchange market more liquid than all others.
What's the result?
We see that interbank activity cannot be so highly effective, because there is a big difference in turnover volumes. And if a simple market participant making an exchange can either receive or not receive a benefit, then transactions concluded by large market players (liquidity providers) will receive a profit under any circumstances.
Of course, large volumes of transactions on Forex can be available only to its largest participants, who are not so quick to find a counterparty who is able to fully satisfy the needs of the company submitting the request. And any transaction made on the currency market must be blocked, that is, if one of the participants purchases a currency from the EUR/USD pair with 1 lot, then the other participant must block the order by selling the same lot - placing an opposite order.
Basically, it's like a tug of war, when you make the right forecast and the price goes up, then you have most of the rope, and the one who sells has a smaller part of this rope. In this case, transactions must be completed instantly.
How can a Forex trader benefit from knowing the principles of liquidity and its providers?
It is liquidity providers who must close open transactions almost instantly and very quickly, that is, how quickly your order will be executed will depend on them. Now imagine that there are hundreds of thousands of such transactions and all of them need to be closed. In order to overlap such a huge number of transactions, it is necessary to have huge amounts of financial resources. But, as you know, brokers do not have such funds, so their activities directly depend on liquidity providers.
It should be immediately noted that to reduce slippage, brokers work with several liquidity providers at once, so when choosing them, pay attention to this - the more providers, the more reputable the broker.
From all of the above, we can draw a simple conclusion - for private traders speculating on Forex, market liquidity will be conditionally infinite, since the volume of their orders will be significantly smaller than the size of orders from various funds and large banks. Therefore, there will always be counterparties to their applications.
The concept of liquidity and its features
