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Liquidity (or market depth) of Forex
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Liquidity (or market depth) of Forex

  #1 (permalink)
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Liquidity (or market depth) of Forex

Dear All,

Many people say the forex market is the largest market (even larger than the futures market) trading many trillions a day.

Some others say that is a false claim because the forex market is fragmented with no central exchange and unregulated, and mostly involves instruments like forwards and swaps that are simply beyond the retailers' access, that only banks and corporations have access to.
And if we consider the market that the retailers have access to, it is just a fraction of the multi trillion dollar a day market pie.

I am interested to know is the forex market really the largest market, and if so, what is the average market depth of the major pairs, like EUR/USD and USD/JPY?

In other words, how much does it take to move the major currency pairs by 1 tick, or say, an equivalent of 0.0125% (1 tick of the ES market assuming it is at 2000, from 0.25/2000), or in forex term, 1.25 pips?

In other words, where is the quantifiable evidence that all traders can execute upon to prove the forex is really the world's largest market, and not a false claim?

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  #2 (permalink)
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  #3 (permalink)
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Dorky View Post
Dear All,

Many people say the forex market is the largest market (even larger than the futures market) trading many trillions a day.

Some others say that is a false claim because the forex market is fragmented with no central exchange and unregulated, and mostly involves instruments like forwards and swaps that are simply beyond the retailers' access, that only banks and corporations have access to.
And if we consider the market that the retailers have access to, it is just a fraction of the multi trillion dollar a day market pie.

I am interested to know is the forex market really the largest market, and if so, what is the average market depth of the major pairs, like EUR/USD and USD/JPY?

In other words, how much does it take to move the major currency pairs by 1 tick, or say, an equivalent of 0.0125% (1 tick of the ES market assuming it is at 2000, from 0.25/2000), or in forex term, 1.25 pips?

In other words, where is the quantifiable evidence that all traders can execute upon to prove the forex is really the world's largest market, and not a false claim?

Good question. Sounds like this is connected to the volume.

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  #4 (permalink)
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Liquidity (or market depth) of Forex

-Market Depth is variable. At last count the average daily Turnover was $5.8 Trillion a day.

-Market Depth Is at its peak in the London/ New York Session Crossover at around 2pm GMT

-In 99% of cases you DO NOT have access to this liquidity. The reason for this is simple. Most Small to Medium size Forex accounts ($25-$5000) which contribute 80% of all retail forex traders are Hedged Internally within the brokerage as a market maker.

- If you do not specify that you want an STP or DMA account you will in the large number of cases not have access to this liquidity and will therefore find that your trades on some occasions do not get processed.

- Within the Forex Markets only 12% of the volume is executed by retail traders.

- To physically move the Market by 1 tick or pip we would need to know the value of all contracts placed in the market at that specific time.

- Remember that 95% of all Institutions that trade the Forex Markets do so by using Pending Orders/Contracts executable only when a suitable counterparty has been found + Price have been reached.

-Therefore at for example 11GMT it may only take between $10-$12 Million dollars to move the market by 1 tick. Whereas at 2GMT it may be 100 times that amount.

- Also remember that because there are orders to be executed at certain prices, when we are approaching support or resistance levels in the Market you will find that the price moves much slower.

- However on breaks of theses levels when stop-losses start getting hit we see reverse orders executed which causes 'spikes' in the market.

So in Answer to your question is the Forex Market The biggest in the World: Yes it is around 100 times larger than any exchange regulated Market.

However the real question is do you have access to the Market and unfortunately whilst a lot of companies will say that you do, in most cases no you won't.

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  #5 (permalink)
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amarno1 View Post
-Market Depth is variable. At last count the average daily Turnover was $5.8 Trillion a day.

-Market Depth Is at its peak in the London/ New York Session Crossover at around 2pm GMT

-In 99% of cases you DO NOT have access to this liquidity. The reason for this is simple. Most Small to Medium size Forex accounts ($25-$5000) which contribute 80% of all retail forex traders are Hedged Internally within the brokerage as a market maker.

- If you do not specify that you want an STP or DMA account you will in the large number of cases not have access to this liquidity and will therefore find that your trades on some occasions do not get processed.

- Within the Forex Markets only 12% of the volume is executed by retail traders.

- To physically move the Market by 1 tick or pip we would need to know the value of all contracts placed in the market at that specific time.

- Remember that 95% of all Institutions that trade the Forex Markets do so by using Pending Orders/Contracts executable only when a suitable counterparty has been found + Price have been reached.

-Therefore at for example 11GMT it may only take between $10-$12 Million dollars to move the market by 1 tick. Whereas at 2GMT it may be 100 times that amount.

- Also remember that because there are orders to be executed at certain prices, when we are approaching support or resistance levels in the Market you will find that the price moves much slower.

- However on breaks of theses levels when stop-losses start getting hit we see reverse orders executed which causes 'spikes' in the market.

So in Answer to your question is the Forex Market The biggest in the World: Yes it is around 100 times larger than any exchange regulated Market.

However the real question is do you have access to the Market and unfortunately whilst a lot of companies will say that you do, in most cases no you won't.


Do you believe those brokerage firms that provide a "no dealing desk" give the retail trader better access to the market liquidity?

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  #6 (permalink)
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amarno1 View Post
-Market Depth is variable. At last count the average daily Turnover was $5.8 Trillion a day.

-Market Depth Is at its peak in the London/ New York Session Crossover at around 2pm GMT

-In 99% of cases you DO NOT have access to this liquidity. The reason for this is simple. Most Small to Medium size Forex accounts ($25-$5000) which contribute 80% of all retail forex traders are Hedged Internally within the brokerage as a market maker.

- If you do not specify that you want an STP or DMA account you will in the large number of cases not have access to this liquidity and will therefore find that your trades on some occasions do not get processed.

- Within the Forex Markets only 12% of the volume is executed by retail traders.

- To physically move the Market by 1 tick or pip we would need to know the value of all contracts placed in the market at that specific time.

- Remember that 95% of all Institutions that trade the Forex Markets do so by using Pending Orders/Contracts executable only when a suitable counterparty has been found + Price have been reached.

-Therefore at for example 11GMT it may only take between $10-$12 Million dollars to move the market by 1 tick. Whereas at 2GMT it may be 100 times that amount.

- Also remember that because there are orders to be executed at certain prices, when we are approaching support or resistance levels in the Market you will find that the price moves much slower.

- However on breaks of theses levels when stop-losses start getting hit we see reverse orders executed which causes 'spikes' in the market.

So in Answer to your question is the Forex Market The biggest in the World: Yes it is around 100 times larger than any exchange regulated Market.

However the real question is do you have access to the Market and unfortunately whilst a lot of companies will say that you do, in most cases no you won't.

Thank you very much for your reply.

So how much trading capital is really needed to have access to the DMA-based liquidity (not internalized)?
What is the requirement to gain access to such liquidity?

Isn't the $5.8 trillion turnover inclusive of OTC deals like forwards and swaps? If so, then isn't such deals an "internal affair" too, instead of traded at the exchange?

Honestly, I find it hard to believe that at market peak we need $1 billion to $1.2 billion to move the market by 1 tick. That would be highly impressive. Maybe there are "terms and conditions" involved. I will have to experience this myself in order to believe it, because such liquidity is just too good to be true.

Still, what does it take to gain access to such liquidity?

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  #7 (permalink)
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I read from some books that says "no dealing desk" could mean:
1. They let automated machine to handle your orders internally, which is still internalization.
2. They relay your orders to a partner bank that provide the quotes, thus the bank controls the bid-ask spread, which is also indirectly an internalization effort.

And some people say that brokers incur high cost in acquiring new customers that they would not give away their customers' orders to the exchange or something like that, but rather internalize the orders in order to earn more profit.

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  #8 (permalink)
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Dorky View Post
I read from some books that says "no dealing desk" could mean:
1. They let automated machine to handle your orders internally, which is still internalization.
2. They relay your orders to a partner bank that provide the quotes, thus the bank controls the bid-ask spread, which is also indirectly an internalization effort.

And some people say that brokers incur high cost in acquiring new customers that they would not give away their customers' orders to the exchange or something like that, but rather internalize the orders in order to earn more profit.

I guess that would not surprise me. Wonder where someone would find this information out.

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  #9 (permalink)
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I know a few market makers so can comment. All OTC products will be handled by a dealing desk. This is because there is no official exchange for the product and like anything, there is always someone on the other side of your trade. When you see OTC rates for FX/XAU/XAG etc all you are seeing is the BBO from a range of institutions, aggregated to give you the tightest spreads.

When you trade on an STP/DMA account, you are accessing a pool of liquidity and BBO's from a range of banks/brokers/market makers/hft firms. They will have algos constantly monitoring their positions and adjusting the spreads etc. This is great and works fine except for two dangers:

1) If the firm you are with is small, they may not do enough volume to attract the liquidity from enough institutions. This means you have a smaller pool of liquidity to trade form which = more slippage.
2) During black swan events, these LP's may turn off their algos and liquidity will dry up. This can mean that you face monster slippage without being able to see it due to lack of depth/volume.

At the end of the day you will still be trading with a dealing desk, just one at a bank which is more automated and more sophisticated. It doesn't make it any safer though. Trade FX futs on CME or EUREX imo.

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Dorky View Post
Dear All,

Many people say the forex market is the largest market (even larger than the futures market) trading many trillions a day.

Some others say that is a false claim because the forex market is fragmented with no central exchange and unregulated, and mostly involves instruments like forwards and swaps that are simply beyond the retailers' access, that only banks and corporations have access to.
And if we consider the market that the retailers have access to, it is just a fraction of the multi trillion dollar a day market pie.

I am interested to know is the forex market really the largest market, and if so, what is the average market depth of the major pairs, like EUR/USD and USD/JPY?

In other words, how much does it take to move the major currency pairs by 1 tick, or say, an equivalent of 0.0125% (1 tick of the ES market assuming it is at 2000, from 0.25/2000), or in forex term, 1.25 pips?

In other words, where is the quantifiable evidence that all traders can execute upon to prove the forex is really the world's largest market, and not a false claim?

You can see the details (and other numbers) here ...

Bank for International Settlements

Attached Thumbnails
Liquidity (or market depth) of Forex-rpfx13fx.pdf   Liquidity (or market depth) of Forex-rpfxf13fxt.pdf  

Last edited by Thxo; July 27th, 2015 at 08:36 AM.
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