Forex Liquidity & Liquidy Providers

Everyone with a basic understanding or experience in trading has heard about Forex liquidity, but only a few of you know what liquidity is and who they liquidity providers are.
And these two terms are your keys to a successful trading experience and your correct choice for a broker.

You should know exactly what liquidity is, why you should be afraid of low market liquidity, what is the difference between liquidity and volatility, and which currency pairs are the most liquid, as well as who are the liquidity providers, and why they are so important when choosing a broker.

If you haven’t found a right broker yet, we welcome you to Price Markets!

What is liquidity?

In the world of financial markets, liquidity refers to the quick ability of assets to be exchanged for money. The faster the exchange is done the more liquid the asset is.

In accounting, the most liquid assets are money and funds, while illiquid assets are buildings, structures, and equipment, which are harder to sell. If you have a smartphone of the latest generation, the probability 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 car that is gathering dust in your garage. Thus, the smartphone is more liquid asset than a car. Liquidity is primarily affected by the level of supply and demand. Coming back to the currency market, it was noted that the presence of a large number of buyers and sellers indicates a high level of liquidity for the currency market. You should know that Forex is one of the most liquid markets. Daily Forex trading turnover could be up to $ 6-7 trillion, and according to some experts, the daily turnover may exceed $ 10 trillion by 2020. Another factor that makes Forex a highly liquid market is the constant need of real businesses for currency exchange. At the same time, the largest volume of trading operations (over 70%) is realized through currency pairs with the US dollar.

If you are trading in a market with high liquidity, you will get better prices from liquidity, a lower spread, a high speed of processing orders, a low probability of slippage, and a smoother schedule without price gaps. Technical analysis, candlestick patterns, and graphical models also work better in liquid markets.

Many traders confuse the liquidity with volatility. Volatility shows the variability of the price per unit of time. At the same time, the market can be both liquid and with low volatility. Spikes in volatility indicate a sharp change in price dynamics. Liquidity is responsible for the smoothness of the price, serves as a kind of buffer that absorbs weak price fluctuations, resulting in a more smoothed chart.

As you know, due to the difference in time zones and trading time on currency exchanges the trading day on Forex is divided into trading sessions. The highest liquidity is observed during the London trading session and the beginning of the US session. During the Asian session, market’s liquidity decreases and almost completely subsides during the Pacific trading session. But this does not mean that the market becomes absolutely calm. During a decrease in liquidity, the Forex market becomes more vulnerable to volatile market movements, which become sharp price spikes. Therefore, because of the unpredictability of the market it is strongly not recommended to trade during the Asian and Pacific trading sessions.

Liquidity and volatility

Main dangers of the low liquidity currency market

When trading on a low-liquid market, you need to know what dangers await you. Basically, all of them relate to the degradations of trading conditions:

widening of the spread

If there are enough orders in the market depth, the spread is close to zero. But with lower liquidity, the number of orders is reduced, and there comes a widening of the spread. This is why it is not recommended to trade on holidays and during news releases – due to the decrease on the liquidity on the market.

slippages

Low liquidity also increases the chance of slippage when deals are executed at a different price level. Slippage occurs when pending orders, stop losses, or take profits are triggered. Slippages are positive (in the case of take profits) and negative (in the case of stop losses).

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gaps

Another negative point associated with low liquidity is price gaps. This occurs when there is a difference in amount of at least 1 point between a sequence of consecutive quotes. Gaps can also be in your favor or against you.

Regarding slippage, if, for instance, you set a stop loss equal to $11, but during the release of important news, liquidity decreased, and the transaction closed with a slip not in your favor, as a result you lose $30 instead of the stated $11. Anyway, even if we will take into account that slippage and gaps can occur in your favor, when market is low in terms of liquidity, the trading process becomes unpredictable. Therefore by these conditions we would not consider them optimal for you to proceed to trade. Just stop and wait till the liquidity comes back to a high level.

Liquidity providers and quotes

Forex quotes are a controversial point among traders – where do they come from and why do different brokers have different quotes? Quotes are received from liquidity providers through a special program that serves as a bridge between liquidity providers and the trading terminal. Liquidity providers are international banks, hedge funds, and top global prime brokers. The program broadcasts quotes from more than 70 different liquidity providers, but this does not mean that all of them provide it automatically. Quotes will only be received from those liquidity providers that the broker has entered into an agreement with.

What are Forex liquidity providers for? Let’s say you want to buy 10 lots, for this they must be sold by someone. The broker can cover them with counter requests from the same trades as you. But if the volume of trader’s orders is too large, the broker may not have enough own funds, and re-sends your orders to the interbank market. Large banks will definitely find the needed amount to meet your request. The more liquidity providers the broker has connected, the better the prices and spreads will be, and the faster your orders will be executed.

Since the Forex market is not an exchange market, but an interbank market, and brokers work with different liquidity providers, the quotes may differ by 5-10 points, and in the case of sudden movements, even more. This is the quite normal situation and exists almost everywhere.

The obvious competitive advantage of Price Markets is the fact that we have contracts signed with most of the largest liquidity providers around the world. We specifically build a system as comfortable as possible for our brokers. When trading on our platform, you will always have the lowest spreads, no slippage, and the highest order execution speed.