Liquidity for the Forex market

Any business involves the creation and increase of assets, which can be expressed in money, other securities, real estate, equipment, etc. At the same time, a very important criterion for the profitability of a business is the amount of not only the growth of its assets, but also the indicator of their liquidity. Let’s consider this criterion in more detail and talk directly about liquidity in the Forex market.

The concept of liquidity and its laws

Liquidity is the ability to sell your assets at a price close to the market price in a short time. Let’s clarify this concept for the Forex market. It operates with various currency pairs – EUR / USD, GBP / USD, USD / JPY, etc. Each pair has its own liquidity. It means the ability of a currency pair to sell / buy without significant fluctuations in its rate.

Now let’s figure out what affects liquidity in the Forex market, what laws it obeys.

Liquidity and business activity

Any asset can show its liquidity only on the purchase and sale market. If we consider the hypothetical case that this market is frozen, then the liquidity of any goods is zero. Let’s start mentally increasing the capacity of the purchase and sale market. For example, suppose we are talking about real estate, and there is one transaction per month in this market. What does this mean? A huge excess of supply over demand. As a result, real estate liquidity is falling. Those who urgently need money will give up their home for a third of its market value. As market activity rises, demand increases and begins to compare with supply. Liquidity is growing. Consequently, liquidity increases with the growth of business activity. For the Forex market, business activity is expressed by the volume of the number of purchase and sale transactions for each currency pair.

Liquidity and volatility

Volatility is the change in asset prices over a period of time. If we talk about Forex, that is, about the currency market, the volatility of any currency shows changes in its value in relation to another currency. For example, today one dollar was worth 1.21 Euro, and tomorrow 1.22 Euro.

It is clear that the higher the volatility of an asset, the greater the risk of getting a loss when selling it. The converse is also true. The higher the volatility, the more income you can get from selling it. A striking example is the bitcoin rate in January of this year, when it demonstrated an absolutely exciting slalom!

On January 1, 1 BTC cost USD 29,271, on January 15, 2021 – USD 39,182, and on January 31 – USD 33,783. That is, bitcoin liquidity fluctuated very much in January.

Using this example, we can conclude that liquidity and volatility are tight correlations, that is, the higher, the higher, or the higher, the lower. High liquidity can occur with high volatility. And maybe at low. But always, the less liquidity, the more volatility. High liquidity makes the market highly inertial and difficult to move. High liquidity is a buffer that softens one-time spikes leading to price changes. Therefore, it is very dangerous for novice traders to invest their funds in securities with low liquidity.

Liquidity for the Forex market

Now let’s talk directly about liquidity for the Forex market. It is clearly very liquid. There are 4 trillion transactions in one day. dollars! That is, in five days, the US GDP is scrolled in Forex! And we have established above that the higher the activity, the higher the liquidity.

The most liquid is the EUR / USD currency pair. The top currency pairs in terms of liquidity also include GBP / USD, USD / JPY, USD / CAD, AUD / USD.

Liquidity providers

What or who are they? First, let’s recall the essence of the Forex market. Consider the EUR / USD currency pair. If you bought 1 euro, it means that someone sold you 1 euro. That is, every Forex trade must be overlapped by the opposite one. And this should be done instantly. Otherwise, market liquidity will immediately collapse.

We said above that the daily Forex turnover is 4 trillion. dollars. Not a single broker has such money. And who has them? Liquidity providers – large banks such as Bank of America, Deutsche Bank, Citibank, etc., as well as various financial funds. Brokers conclude contracts with them to ensure their activities.

There is a second way. Conclude an agreement with liquidity providers who, using special software, unite liquidity providers, uniting them into one whole. The most famous liquidity providers are LMAX Exchange, Currenex, Integral, Sucden Financia, etc. This option is simpler. It’s like it is easier for an online store to conclude an agreement with a payment aggregator than with many acquiring banks and payment systems. Simpler, but not necessarily cheaper. It all depends on the fees that providers and liquidity providers charge for their services. In reality, both options work – brokers enter into contracts with suppliers and liquidity providers.

Liquidity and spread

Spread is the difference between the best buy (ask) and sell (bid) prices for an asset. For the Forex market, an asset is a currency. The broker sets the ask and bid for each currency pair. That is, he sells the currency to the trader at the ask price, and buys at the bid price. Thus, the spread is the broker’s commission that he charges the trader for his services. In order for a trader to make a break-even deal, it is necessary that the currency quotes change by an amount greater than the spread. Of course, in a direction favorable to him. For example, if he works with the EUR / USD pair and sells euros, then against the dollar the euro should grow by an amount greater than the spread from the moment the trader bought these euros.

With high liquidity of currency pairs, the spread is minimal and usually does not exceed three points. A high spread means high volatility, and therefore less liquidity. The broker insures itself against losses by the size of the spread. The spread size directly affects the volume of orders. The smaller it is, the higher the trading volume. But with a large number of orders, the liquidity provider may not have time to process them all. In jargon, this means eating up deals. As a result, price slippage occurs. That is, orders that were submitted at one price are processed at another. This is called the Depth of Market. The size of this order book directly depends on the broker. The more liquidity providers it works with, the less price slippage.

If you are a trader and choose a broker, then pay attention to which liquidity provider he cooperates with.

Liquidity and leverage

Leverage in the Forex market is the ratio in a transaction of a trader’s personal money and the money that a broker provides to him for its execution. For example, a trader sells $ 10,100 with a 1: 100 leverage. This means that the transaction involved $ 100 trader and $ 10,000 broker.
Leverage is very important in Forex. Due to its liquidity, currency quotes change very slowly. Their dynamics is expressed in hundredths of a percent! Forex is operated on a fraction of a percent, and in points. If quotes are shown as X, UUUU, then one point is equal to 0.01% or 0.0001. If the quote is provided in the form of X, UUUUU, then one point is equal to 0.00001. For example, the current quote for the EUR / USD currency pair is 1.1978. Its change during the transaction was four points. That is, at the beginning it was 1.1977 and increased by 1.1981. Therefore, on the sale of 1000 euros, the trader earned 1000×0.0001 = 0.1 euros. Therefore, it makes no sense to operate with small amounts on Forex. But the vast majority of traders do not have large amounts. Therefore, they cannot do without brokers. After all, for example, with a successful sale of 100,000 euros, the profit will already be 40 euros. With a spread of 3 pips, the trader’s net profit will be 10 euros. A trader can make dozens of such deals during the day.

It follows that leverage dramatically increases the number of transactions in the Forex market. And this directly increases its liquidity. The higher the leverage, the greater the volume of transactions, the higher the liquidity. The main thing is that the broker has the necessary amount of money to satisfy all traders’ orders.

The size of the spread, that is, the commission that the broker takes from the trader for providing leverage, is one of the decisive factors when choosing a broker by a trader.

Liquidity by time of day

Forex liquidity is highly dependent on the time of day. He himself works around the clock, which cannot be said about its participants, which is due to the fact that they live in different time zones. The least activity, and hence liquidity, is observed during the Asian session. The largest is at the opening of the European trading session. Then it gradually decreases, but with the opening of the American trading session it increases and decreases again until the close of the stock exchange in New York.

With high liquidity, even a large single participant will not be able to move the market. Its financial capabilities are significantly inferior to the volume of transactions at this moment. But with a decrease in liquidity due to a decrease in the volume of transactions, such an opportunity appears. It often happens that after a period of low business activity, the Forex market radically changes direction in a completely different direction. Therefore, during such periods, we advise you to focus on the economic calendar. It is better to close all your positions an hour before important news appears. This will help protect your funds from the actions of large players in the Forex market.

Tobebroker Liquidity Provider

Our company has been working in the Forex market for several years, being a liquidity provider. We wrote above that the attractiveness of a broker for traders largely depends on the size of the spread that it offers them. The smaller the spread, the more attractive the broker is. But the size of the spread largely depends on the commissions with which the broker works with liquidity providers and providers. The smaller they are, the smaller the spread the broker can offer to traders.

Our company tobebroker can act as a provider of quotes and liquidity, both in the Forex market and in the cryptocurrency market. By ordering a liquidity and risk management service from us, a broker will be able to significantly save money, monitor the company’s risks, and receive more than 2,700 trading instruments. Working with Tobebroker, a broker of any size will significantly expand its capabilities and, thanks to our low commission, we can become an object of desire for traders, offering them the minimum spread on the market.

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