Liquidity Definition

 In Forex Education

This enables brokers to offer and provide liquidity to their own clients for ordinary trading. Exotic currency pairs are thinly traded currencies, lack market depth, are illiquid and traded at low volumes. Examples of exotic currencies include the South African Rand and the Thai Baht. As we noted earlier, the top liquidity providers in the FOREX market are known as Tier 1 liquidity providers. FOREX brokers usually connect with a number of liquidity providers to obtain better dealing rates and spreads. In doing so, they can offer their customers the best price obtainable from multiple liquidity providers.

When talking about liquidity in trading, we understand that we don’t own a specific asset. Instead, it’s an opportunity to buy or sell an asset quickly and without losses. Both of these indicators take the guesswork out of identifying liquidity pools by showing you exactly where traders are placing their stops and letting you see the market like a market maker.

  • Whether current liquidity is high or low depends on a variety of factors such as the volume of traders and time of day.
  • The most prominent way to determine the level of risk is to evaluate the spread between the bid and ask prices.
  • He is a CFA charterholder as well as holding FINRA Series 7 & 63 licenses.
  • Here too, the higher the liquidity risk, the higher the expected return on the asset or the lower is its price.
  • One way to manage liquidity risk is through the use of guaranteed stops, a type of stop-loss that ensures your position is closed at your pre-selected price level.

Their cutting edge technology solution allows their clients access to institutional liquidity pools and benefit from the most competitive spreads in the industry. As the preceding section illustrates, one of the other key factors that contribute to the deep liquidity in the foreign exchange market is the high number of active participants operating all over the world. Since forex is an ‘over the counter’ market, there is no official data about volume and open interest, so liquidity can be estimated by the number of price ticks and spreads. As an example, a high amount of price ticks and low spread will signify a high liquidity, while a low amount of price ticks and a high spread will signify a low liquidity. Securities that are traded over-the-counter such as certain complex derivatives are often quite illiquid.

Plan Your Trading

In terms of investments, equities as a class are among the most liquid assets. Some shares trade more actively than others on stock exchanges, meaning there is more of a market for them. In other words, they attract greater, more consistent interest from traders and investors. These liquid stocks are usually identifiable by their daily volume, which can be in the millions, or even hundreds of millions, of shares. Traders usually avoid the usual market maker model, where brokers can have a conflict of interest, trading on the other side of the client.

what is liquidity in forex

The top liquidity providers in the foreign exchange market are known as “Tier 1” liquidity providers. Providers of liquidity today are not just the large banks operating in major money center cities, but also online brokers that make markets to retail clients situated all over the world via the Internet. Due to the enormity of the forex market, which currently experiences daily transaction volumes in excess of six billion U.S.

Most online forex brokers and many commercial and investment banks with active foreign exchange divisions are market makers in a variety of currency pairs. In general, a forex market maker will willingly buy forex positions from and sell Forex Club forex positions to their clients at virtually any time the market is open. The primary liquidity providers in the over the counter Interbank forex market are market makers operating at major commercial banks and some investment banks.

The Importance Of Liquidity In Forex

Whether current liquidity is high or low depends on a variety of factors such as the volume of traders and time of day. When you’re trading financial markets, liquidity needs to be considered before any position is opened or closed. Karnaukh, N, A Ranaldo, and P Söderlind , “Understanding foreign exchange liquidity”, Review of Financial Studies, forthcoming.

Take the time to understand liquidity and how you can benefit from trading different assets. Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices. In the example above, the market for refrigerators in exchange for rare books is so illiquid that, for all intents and purposes, it does not exist. Central Banks usually avoid intervening in the forex markets, unless there is a dire need. They provide liquidity to their respective nations through money market operations. They are approached, typically, as a last resort, by commercial banks for loans, which are then passed on to the primary dealers.

It allows you to understand and view current liquidity and liquidity in previous sessions, in real time. Higher liquidity usually means better spreads as more transactions are being made. The liquidity calculation takes into account many brokers and top 10 traded currencies to calculate the liquidity per each minute for the last 48 hours. You can use the chart zoom in feature to zoom/select a custom timeframe and have the liquidity automatically calculated. The average liquidity of the past 24 hours is used as a 100% liquidity basis for percentage calculation . For example, a 110% reading will tell you that the current liquidity is 10% above the last 24 hours average liquidity.


In a topsy-turvy week, CAD was the one to rule them all by Friday, likely benefiting from the run higher in oil prices as well as on the post-Fed return to risk move. This means that pairs like EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD experience high liquidity. There is the possibility that it takes some amount of time before the conversion of the asset into $100 of cash takes place. There are two frictions that lead markets to be less than perfectly liquid, or illiquid.

The volume indicator is a famous measure of market liquidity because it seems logical that high trading volume signals high market liquidity. For example, the stock market is more liquid than the real estate market. Liquidity stands for the ability of a company or an individual to convert something they own into cash immediately and at a desirable price.

what is liquidity in forex

First, we provide a methodological contribution to the measurement of foreign exchange liquidity using daily and readily available data. Thus, it has been difficult to explain the significant temporal and cross-sectional variation in currency liquidity. Third, our study sheds light on the determinants of commonality in foreign exchange liquidity. A liquid market is more logical, it follows price patterns like trends, support and resistance levels etc. Liquidity minimizes losses – there is no worse place to be than the wrong side of a trade in an illiquid market.

Currency Market Liquidity

No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.

Accounting Liquidity

On the other hand, an asset that is not easy to sell without a drastic reduction in its price is said to be illiquid. This is often a result of uncertainty among traders with regard to its actual value, or it could be down to a lack of market interest for it to be regularly traded. In the global financial market, currencies are generally considered to be the most liquid assets, with collectables, real estate and fine art all being relatively illiquid.

The finding implies that those traders in the post-announcement market behave more like uninformed traders. Exotic forex pairs and small-cap stocks are among the most illiquid financial markets, though there are many others. The most illiquid investment market is real estate, due to the sheer amount of time that the process of buying and selling property takes. Liquidity is one of the most important factors in the foreign exchange market — as it is in other trading markets.

Treasury bonds compared to off the run treasuries with the same term to maturity. Initial buyers know that other investors are less willing to buy off-the-run treasuries, so the newly issued bonds have a higher price . The forex market is extremely liquid and there’s more than enough liquidity to go around for us small fish in the retail trading scene. Treasury plays a crucial role in supporting financial objectives and informing strategic decisions.

The most liquid currency pair on the foreign exchange market is without a doubt the Euro quoted against the U.S. This currency pair has an average daily volume in excess of 580 billion USD. Due to the number of participants, the depth of the what is liquidity in forex market and the two currencies’ widespread international usage, bid /offer spreads on the EUR/USD currency pair can range from 0.25 to 1.8 pips. The liquidity section provides rough estimates of the trading activity in the forex market.

Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of a bank’s value and success is the cost of liquidity. Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators.

In fact, most banks now source liquidity for buy-side clients from other banks rather than publish a firm bid and offer process of their own. This “recycling” of liquidity may even be prompting the shrunken class of market-making banks to widen spreads. The major commercial bank liquidity providers include Citibank, Deutsche Bank, Societe Generale, Union Bank of Switzerland and HSBC. One way to manage liquidity risk is through the use of guaranteed stops, a type of stop-loss that ensures your position is closed at your pre-selected price level.

Trading volume in the GBP/USD currency pair is estimated to be approximately 350 billion USD per day. The image below depicts the company logos of some of the largest Tier 1 banks that currently provide liquidity to the forex market as market makers. Credit note Cash is the most liquid asset followed by cash equivalents, which are things like money markets, CDs, or time deposits. Marketable securities such as stocks and bonds listed on exchanges are often very liquid and can be sold quickly via a broker.

The most basic measure of liquidity in any asset is the bid-ask spread. When the spread is small it indicates there is sufficient liquidity, however if the spread is wider the liquidity of the asset may not be sufficient, especially if an investor needs to unload a large amount of the asset. Market liquidity used to be measured by the trading volume of an asset, but that is now considered to be a flawed indicator since high trading volume does not necessarily imply high liquidity. The market global financial crisis of 2008 and the flash crash of May 2010 are the clearest examples of this. Liquid assets, however, can be easily and quickly sold for their full value and with little cost.

Author: Korrena Bailie