Foreign exchange liquidity refers to the liquidity of foreign exchange transactions. The liquidity of foreign exchange transactions is very important to us, whether it is an ordinary trader who is exposed to foreign exchange or a liquidity provider who studies the B-side of finance, that is, LP.
The definition of trading liquidity is still different, but in fact, no matter how it is defined, we can all think that liquidity is actually the ability of investors to trade a certain amount of assets quickly at a reasonable price according to the basic supply and demand relationship in the market.
Or more simply, liquidity is the cost of executing a certain number of transactions quickly. The higher the liquidity of the market, the lower the cost of instant trading. Generally speaking, lower transaction costs mean higher liquidity, or correspondingly better prices.
Where does the liquidity of the foreign exchange market come from?
The biggest difference between the foreign exchange market and the stock market is that there is no specific exchange. The foreign exchange market is an over-the-counter market. There are many participants in this market, including government, central bank, large banks, enterprises, institutional investors, other financial institutions and individual investors.
After understanding the liquidity of the foreign exchange market, come with me to see where it all comes from. It is not difficult to infer that good liquidity must come from a good liquidity provider. In the foreign exchange market, the main source of liquidity is the major banks. According to the data of the Bank for International Settlements, about 70% of the liquidity in the foreign exchange market comes from international banking giants including Citibank, Deutsche Bank and HSBC.
These banking giants will provide quotations as quotation sources, and then integrate quotations through liquidity suppliers to form an inter-bank foreign exchange trading market. Brokers can obtain liquidity from liquidity suppliers in the inter-bank foreign exchange trading market, and finally brokers will provide liquidity to ordinary traders for trading.
In addition to major banks, other multi-market participants are also providing liquidity for the foreign exchange market. For example, multinational companies that often need to exchange foreign currency, enterprises that need to buy raw materials from overseas, hedge funds, etc.
Why is the liquidity of the foreign exchange market sustainable?
I think the top market liquidity of financial derivatives such as foreign exchange must be very good. Let's analyze it. First of all, participants in this market include the central bank, an influential counterparty, which is unmatched by other markets. For example, the stock and futures markets that investors are most familiar with are limited by trading places and trading time; However, the foreign exchange market operates 24 hours a day, five days a week, and hardly stops the market. From the point of view of trading, investors can remit or remit funds at any time without being limited by time, which is highly liquid and flexible.
What benefits does the liquidity of the foreign exchange market have for investors?
For investors, the greater the liquidity, the faster the investment will be converted into capital. Investors who have been engaged in foreign exchange trading must feel that the buying and selling process is almost real-time.
Adequate liquidity means that investors can enter and leave the market 24 hours a day, anytime and anywhere. The good liquidity of foreign exchange transactions makes more and more institutional investors and individual investors enter the foreign exchange market, which in turn leads to the continuous optimization of market liquidity.
More importantly, the more liquid the market, the smoother the transaction and the more competitive the quotation. Strong liquidity means large turnover, good market depth and relatively low transaction costs.
Other advantages besides liquidity
What are the advantages of the foreign exchange market besides timely trading? For the vast number of retail investors, sufficient liquidity makes it impossible for those giants to cause huge market fluctuations through individual large orders and harm the interests of other investors. For some investors with large funds, there is no need to worry that one of their big orders will cause too much market fluctuation, which is also one of the advantages of the foreign exchange market. In the case of sufficient liquidity, it is almost impossible for the foreign exchange market to have an extreme situation similar to short selling in other markets.
In a trading market, the more participants there are, the more realistic the market reaction will be, and it will be very difficult to manipulate the market, which can ensure the openness and transparency of the market to the greatest extent.
Finally, foreign exchange trading is 24 hours, and investors can operate almost at any time according to new market changes.
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