What Is Forex Liquidity?
May 23, 2021
While talking about the Forex market, it is somehow strange to mention the notion of liquidity, as fiat currencies are considered assets with absolute liquidity. This said a holder may buy and sell any currencies by the up-to-date market price. The FX statistics impress, showing the 24 h trading volumes of more than $6.6 billion. Meanwhile, a reliable liquidity provider is among the most important criteria for newer players who are going to enter the market. Let’s clear things up.
The scope of responsibilities of a liquidity provider
In general terms, the Forex market is the general term for space where all currencies are bought and sold, and private traders cannot access this space on their own. Brokerage companies serve as mediators, offering their clients to trade currency pairs. The overall number of companies that have already entered the FX market exceeds 3000.
Forex liquidity is maintained by major banks, hedge funds, and other largest financial institutions. Providers connect brokerage companies with those institutions, filling order books with the endless amount of bid and ask offers. What if a broker refuses to deal with providers of FX liquidity? Such a company relies on its own order book, matching bid and ask orders placed by its clients.
When do those brokers face hurdles? Foremost, everything depends on how many clients have accounts on a platform. For instance, a broker of 10 000 and more clients may resist the deficit of the order book effectively. On the other hand, trading pairs of low popularity should be taken into account as well.
Problems caused by the lack of liquidity
The EUR/USD has the highest liquidity, covering 20.03% of the market. It is hard to imagine that the order book lacks bid and ask offers related to this pair. What about less popular trading options? For instance, the XAU/USD pair covers 2.88% of the market, and a broker may face hurdles when a trader wishes to exchange a large amount of XAU/USD units. The lack of liquidity leads to the necessity of buying higher and selling lower.
For instance, the XAU/USD cost is 1775.1824, and a trader finds some 10 units at this price while other offers are higher than the market price. As such, traders face losses and understand that it is high time to join other brokerage companies.
A reliable Forex liquidity provider prevents such situations, offering traders to buy and sell pairs in correspondence with the market.
Can market-makers be liquidity providers?
Many traders frequently confuse FX market-makers and liquidity providers, and the differences are truly blurred. Major banks and other financial institutions ‘make’ the market active and theoretically, a brokerage company may deal with those institutions without any mediators. Meanwhile, the best liquidity providers offer access to market-makers of the Tier-1 group (largest entities), making a company’s book of order exceptionally broad.
High liquidity in Forex guarantees a string of advantages for traders, as spreads are close to 0, no gaps, and no price slippage effects take place.
This said, brokerage companies need to find a reliable provider that is able to jump a company’s level higher.
Criteria to take into account
It is a challenging task to point out the best liquidity providers, as the service is suggested by numerous companies. Apply to the companies that provide Tier-1 liquidity. Look through the list of liquidity providers suggested by our specialists. Every company is listed with detailed information to help brokerage companies make the right decision.