Liquidity of currency pairs refers to the degree of market activity Liquidity depends on the number of active traders in the market and the total trading volume The reason why the foreign exchange market is so liquid is the 24-hour trading system.

The foreign exchange market is also a booming market with a daily turnover of nearly $6 trillion.

While liquidity fluctuates with the opening and closing of global financial centers, the volume of foreign exchange transactions generally remains at a relatively high level.

What is volatility?

Volatility is a measure of the degree to which price changes in the market The liquidity of currency pairs has a significant impact on the volatility of market prices.

With lower liquidity, the market is more volatile, which leads to large price fluctuations; With higher liquidity, the market is less volatile, which leads to price stability.

Liquid markets such as the foreign exchange market have a relatively small growth trend where high liquidity leads to low volatility.

At the same time, the more traders are, the lower the price fluctuations in general. However, sudden, drastic movements can also occur in the foreign exchange market.

Prices also fluctuate as currencies are affected by many factors, including political, economic and social events.

Traders should pay attention to current events and financial news to spot potential gains and better avoid potential losses.

What is foreign exchange liquidity? What is the importance of foreign exchange liquidity?

In the world of forex trading, the liquidity of currency pairs is one of the most important elements for creating profitable trades. The stronger the foreign exchange market liquidity, the smoother the transaction and the more competitive the quote.

The huge trading volume in the foreign exchange market makes for unmatched liquidity by other capital markets however, the liquidity of the major currency pairs has a very clear advantage.

Minor currency pairs and exotic currency pairs will still have liquidity issues, especially when unexpected news events or major economic data are released, and the market often falls into liquidity in increasing spreads.

Liquidity in financing and investing often shows how quickly investors can turn their investments into cash.

For example, buying and selling shares usually takes 5 business days, while most foreign exchange transactions can be done within 2 business days CAD/USD is the exception, which is usually the next day.

Although these illiquid market conditions can sometimes occur in the forex market, the volume of transactions in the forex market is usually successful enough to allow transactions to be completed very quickly.

There is no doubt that the foreign exchange market has the best liquidity, so lower spreads are possible and the market is able to absorb large orders constantly.

Who provides liquidity to the foreign exchange market?

High trading volumes by some other market participants can also increase the liquidity of currency pairs in the market.

There are many active players in the foreign exchange market, and each of them has its own characteristics. The liquidity of foreign exchange transactions comes from many companies, institutions, individuals and governments.

Forex market liquidity

One of the reasons that bring high liquidity of currency pairs to the foreign exchange market also includes the open and continuous trading hours.

Global trading hours overlap in different time zones, starting with Sydney on Sunday afternoon and ending in New York on Friday afternoon.

Convenience of foreign exchange transactions is undoubtedly an important part with the availability of investment funds and internet cable, anyone can trade online.

Before the advent of the Internet, large institutions and commercial banks were the largest providers of foreign exchange liquidity, and now online brokers are the main force in providing liquidity.

The most liquid currency

As mentioned before, more liquid currency pairs will give traders more profit opportunities The higher liquidity of a currency pair is reflected in the trading spread and market reaction.

Undoubtedly, the most liquid currency pair in the foreign exchange market is the Euro against the Dollar (EUR/USD).

The average daily trading volume for the pair exceeds $580 billion, with a spread as low as 0.25 to 1.8 pips.

The second most liquid currency pair is USD/JPY, with an average daily volume of $577 billion and spreads between 0.5 and 2.5 pips.

USD/CHF, GBP/USD, AUD/USD, etc. are all very liquid.

Many traders do not fully understand the importance of currency pairs liquidity providers since liquidity providers often trade on the other side of their clients, traders may think that the other side has taken their profits.

How to get liquidity in the decentralized forex market

In emerging markets, the shift of market participants to various electronic forex trading platforms has led to market segmentation, increased workload and cost for financial institutions.

How can aggregators like Refinitiv FX Aggregator help traders access liquidity?

Electronic forex trading is becoming increasingly popular in emerging markets, largely due to the growth in currency trading, increased transparency, migration to electronic platforms driven by the COVID-19 pandemic and technological developments.

But this trend has led to the fragmentation of foreign exchange markets in emerging markets, making it difficult for financial institutions to connect their systems to these trading platforms.

The foreign exchange market has developed a heavy dependence on electronic channels More than 80% of the volume of the spot market is traded electronically.

As the market continues to evolve, new trading venues have emerged that focus on different products or currencies, or even support new trading patterns where electronic trading meets the need for accurate data, regulatory reporting and compliance, while also meeting the need for liquidity and the ongoing need to improve middle and back office efficiencies.

Workflow efficiencies will lead to the wider adoption of electronic workflows by many organizations in the market, and buyers will increasingly switch to transaction models on the forex trading platform.

E-Forex Trading in Emerging Markets

Emerging markets have been slower to adopt e-commerce as their currency is less liquid, more volatile, and is dominated by country-specific exchanges or voice traders.

As FX volumes in emerging markets have grown to account for 23% of all global currency transactions, the need to efficiently manage these flows electronically has also increased.

The foreign exchange market is becoming more transparent, as a result of which electronic transactions will increase. This facilitates price discovery and allows more players in the forex market to go electronically, creating a domino effect.

Recently, the outbreak of COVID-19 has limited the operation and use of many live trading desks, accelerating the transition to electronic platforms.

This trend is likely to continue as more and more clients now have first-hand experience with electronic trading.

Read also: How much is the trading volume in the forex market?

The continuous development of technology in electronic transactions

In addition, the continuous development of technology has made electronic transaction solutions cheaper and more accessible to all.

This has resulted in a highly fragmented foreign exchange market, with over 100 electronic platforms currently in the market, each offering unique workflow or liquidity features.

Although the market is concentrated in fewer trading venues, decentralization is an important industry trend.

Concerns about the total cost of ownership (TCO) may prevent further diversification, but it has not been able to reverse the trend so far.