In the world of forex trading, one of the most important elements in creating profitable trades is liquidity. The stronger the liquidity of the foreign exchange market, the smoother the transaction and the more competitive the quotation.
The huge trading volume of the foreign exchange market makes its liquidity unmatched by other capital markets. However, the liquidity of major currency pairs has a very obvious advantage, and minor currency pairs and rare currency pairs will still encounter liquidity problems, especially when unexpected news events or key economic data are released, the market often falls into liquidity The state of lack of sex leads to an increase in spreads.
No.1
source of liquidity
The liquidity in the foreign exchange market mainly comes from large international banks, such as Citigroup, JPMorgan Chase, UBS, Deutsche Bank, ABN AMRO, HSBC, etc., and they have the right to quote, also known as primary liquidity providers.
Other market participants such as central banks, commercial and investment banks, hedge funds, forex investment managers, retail forex brokers, high-net-worth individuals, etc., which generate high trading volumes increase market liquidity.
No.2
access liquidity
Access to the liquidity of large banks requires a high amount of funds, ranging from millions to tens of millions of dollars, so as to ensure that they can create guaranteed profits every month. Therefore, most retail foreign exchange brokers do not directly contact large banks, but obtain liquidity through liquidity providers (LP).
Tier 1 banks are too far away for retail traders with smaller assets and trade sizes. Forex liquidity for retail traders comes from online brokers, or secondary liquidity providers (small banks, payment companies, etc.).
Many large online brokers have access to several Tier 1 liquidity providers to execute most orders. These online brokers generally choose providers that are strong enough to reduce counterparty risk.
No.3
LP's functions
Foreign exchange liquidity provider, referred to as foreign exchange LP, provides liquidity services for non-bank market participants, including:
• Integrate various quotations in the market, capture the best price and feed it back to downstream retail foreign exchange brokers and investors;
• Clearing clients' orders to recipients in international markets.
• Provide liquidity data service, liquidity technology development, provide technical support for foreign exchange brokers, etc.
No.4
Most Liquid Currency Pairs
The most liquid currency pairs will bring traders more profit possibilities. The high liquidity of the currency pair is reflected in the trading spread and market reaction.
Without a doubt, the most liquid currency pair in the foreign exchange market is the euro against the dollar (EUR/USD). The currency pair has an average daily trading volume of more than $580 billion, with bid-ask spreads as low as 0.25 to 1.8 pips.
The second most liquid currency pair is the U.S. dollar against the Japanese yen (USD/JPY), with an average daily trading volume of $577 billion and spreads between 0.5 and 2.5 pips.
Liquidity is very high for USD/CHF, GBP/USD, AUD/USD, etc.
No.4
difference in quotation
Even if an LP provides orders to two brokers at the same time, the execution of the orders will not be completely consistent, and different quotations may appear.
Because LP will classify brokers according to the amount of funds and order volume, the order execution services obtained by different types of brokers are different.
No.5
Liquidity is good or bad
Whenever there is a major market coming, the price of the foreign exchange market will fluctuate violently. The moment an investor places an order, LP will judge whether the previous bank or fund institution is willing to accept the order, and they will consider the risks involved.
At this time, if the liquidity is not sufficient, the investor's order may be partially filled, partially slipped or unable to place an order. Therefore, there is no perfect liquidity provider in the foreign exchange market. The liquidity of LPs is not good or bad. We only look at which LP has more sufficient liquidity.
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The most important thing in the foreign exchange market or other trading markets is liquidity. Low liquidity will lead to unexpected fluctuations in currency pairs. Say a bank suddenly receives a huge order, and the deal can drive market volatility for a short period of time.
Many traders do not fully understand the importance of liquidity providers. Since liquidity providers often trade on the opposite side of customers, traders may even think that the other party has taken their profits. Customers believe that there is a conflict of interest with the liquidity provider, which is what the latter has nothing to do.
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