Liquidity of the FX market

Money influx defines the highest degree of liquidity. The most liquid global trading platform is Forex. Its volumes are the sum of liquidity of different markets. Daily trading volume on Forex is trillions of dollars, that's why it has the highest liquidity. The number of buy and sell orders is so large that you do not have to worry about having a counterparty for any position.

 

A highly liquid market means stable operations with a large number and high volumes of transactions. In Forex it is first of all currency, the lower is the difference between the sell and buy price, the higher is the probability that the market will you well-heeled. If the gap in prices is big enough, there is a huge risk of financial collapse.

 

If the market is highly liquid a single transaction will not be able to globally affect the price of a commodity. That's why it often happens that newbies of the market believe their brokers' assurances that they are providers of high liquidity. When approaching the broker and investing money, clients trade with full confidence that their broker, even under the most unfavorable conditions, will be able to conduct the transaction with the maximum profit. 

 

FX brokers, especially with direct transaction processing (STP), try to cooperate with many large liquidity providers in order to maintain their own prices and liquidity at the proper level. It’s a matter of common practice when liquidity providers are large financial institutions or banks, which trade currencies on a huge scale. In other words, they dispose of such huge amounts that a trader, when selling currency, is most likely to choose them, respectively to buy it from them. Liquidity providers dispose of huge amounts of money, so there is always a buyer and a seller at the market. Sometimes there are cases when a broker can sell the currency without transferring any deals to liquidity providers. In other words, when you buy, you are not purchasing from the seller to whom your broker sent the transaction, but from your own broker. These brokers are called market makers, they can be deemed as counterparties.

 

Liquidity is provided by the large market participants by market makers — the greater their quantity, the higher the probability that a deal will be made regardless of the trading sessions and time in different countries of the world. The liquidity provider connects traders and brokers, increasing the liquidity of the resulting market. Due to high liquidity spreads and accordingly trading costs are reduced, that is why everybody wants to get higher liquidity.

 

A liquidity provider is a large market participant, which unites funds and financial institutions, as well as the largest banks of the world into a network, forming a pool of news, quotations, and price flow for smaller market participants.

 

Large banks or investment companies, which are the providers of liquidity, periodically reach out to Forex, but their purpose is not only speculative considerations, the reason for this may be the need to satisfy currency exchange requirements or other purposes. For example, when a company needs a certain amount of money in order to open a new branch.