What You Need to Know About Foreign Exchange Liquidity

“Liquidity” is one of the most talked about topics when it comes to currency trading.

What is liquidity?

When an asset can be easily converted into cash, the asset is liquid. From a financial perspective, “liquidity” refers to the ability of an asset being liquidated at a reasonable price or converted into a means of payment without being converted to other assets first. One can also define liquidity as the cost of cashing out the asset held by an investor at the current market price. The easier the process (ie, the lower the cost), the higher the liquidity.

Liquidity Providers and sources of liquidity

When foreign exchange dealers such as forex brokers establish their own retail business, one of the first things they do is find liquidity providers (LPs). LPs are typically firms or institutions that provide currency pair pricing and then participate in the trade as either a buyer or seller.

For the foreign exchange market, the major global banks are the main sources of liquidity. In fact, according to the Bank of International Settlements, about 70% of the liquidity in the foreign exchange market comes from global banking giants such as Citibank, Deutsche Bank, HSBC, JPMorgan Chase, UBS, etc. These banking giants provide currency pricing quotes and make up a significant proportion of the interbank foreign exchange market. Additional sources of liquidity include market players such as central banks, hedge funds, foreign exchange investment managers, retail forex brokers, and high net worth individuals.

Brokers can obtain liquidity from these or any LP in the interbank foreign exchange market. This enables brokers to offer and provide liquidity to their own clients for ordinary trading.

Liquidity providers’ roles

Foreign exchange LPs provide liquidity services for non-bank market participants, including:

  • Integrate various market quotations, obtain best price and forward to downstream retail forex brokers and investors
  • Clear customer orders to recipients in the global markets
  • Provide liquidity data services, liquidity technology development, and support for forex brokers.

Conclusion

Liquidity is one of the most important factors in the foreign exchange market—as it is in other trading markets. In fact, LPs stabilize the forex market because they buy and sell currencies at any given time, in most market conditions. This enables traders to buy or sell when they want to, without having to wait for another trader looking to do the opposite.

Also, low liquidity can cause unexpected fluctuations in a currency pair. For example, if a bank receives a huge order for a specific currency, the deal could drive market volatility in a short period of time for that currency, and also have a ripple effect.

Fortex Liquidity Providers

The Fortex ECN platform offers direct access to Tier 1 liquidity from all major money center banks. Gain instant, low-cost Straight-Through Processing (STP) of your orders at razor-thin spreads, as well as powerful trading features unmatched by any other FX platform on the market. Get real-time executable streaming quotes from more than 50 liquidity providers for over 80 global currency pairs as well as metal, energy and CFD products.

Fortex liquidity providers include money center banks such as Bank of America, Barclays, BNP, Citi, Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Macquarie, Morgan Stanley, Nomura, and UBS. Fortex also receives liquidity from numerous hedge funds and broker-dealers.

Learn more by contacting [email protected].