Why is liquidity so low in Forex?

[SimpleTrader09]

I've read that the Forex market is huge in comparison to the stock market, and so I looked on FXCM at the market depth and it is actually surprisingly small. The market depth shows the tight bid ask spread with only a million in terms of size on the bid ask, equivalent to about £60 per point say for GBPUSD. You can do that size on a spreadbet firm. Of course because of the depth, there are levels with bigger size and you could go further, lets say, £2000-3000 per point, but then you are getting filled a point or so further away.

Now 2000-3000 per point is a lot of money admittedly, but in the big scheme seems a surprisingly small amount to be moving the currency market. I assumed only big orders would move the market.

What am I missing here? Why would such small amounts get filled away from the bid ask? How can someone as small as a spreadbetter at £60 per point or so actually move a major currency market?!

I imagine I'm being stupid and missing something, or is this the largest size that can be traded in the short term, and larger positions must be built slowly?

P.S. I understand that FXCM aren't showing the full liquidity available, but still, they are showing a fair percentage of it right?

 

[Pippy5000]

It's the end of the year... wait until Jan 2nd and then look again

 

[GammaJammer]

Even then, this isn't a simple, one line answer. But watch this space. Will be adding something in 2010 on this exact subject. Just bear with me...

 

[Rhody Trader]

FXCM is one broker/market maker among many with a retail facing business. Yes, they are one of the larger ones, but it's still retail. Basically, what they are showing is a fraction of a small fraction of the real spot market. The major liquidity is in the inter-bank market. I'll leave GJ to expand upon the subject.

 

[everyonerich]

SimpleTrader09, DeustcheBank is the biggest player of fx market (2009), usually dont really bother with brokers unless you got plenty of money to play then shouldnt use retail broker.

 

[tar]

I've read that the Forex market is huge in comparison to the stock market, and so I looked on FXCM at the market depth and it is actually surprisingly small. The market depth shows the tight bid ask spread with only a million in terms of size on the bid ask, equivalent to about £60 per point say for GBPUSD. You can do that size on a spreadbet firm. Of course because of the depth, there are levels with bigger size and you could go further, lets say, £2000-3000 per point, but then you are getting filled a point or so further away.

Now 2000-3000 per point is a lot of money admittedly, but in the big scheme seems a surprisingly small amount to be moving the currency market. I assumed only big orders would move the market.

What am I missing here? Why would such small amounts get filled away from the bid ask? How can someone as small as a spreadbetter at £60 per point or so actually move a major currency market?!

I imagine I'm being stupid and missing something, or is this the largest size that can be traded in the short term, and larger positions must be built slowly?

P.S. I understand that FXCM aren't showing the full liquidity available, but still, they are showing a fair percentage of it right?

FX is a big market there is a plenty of liqidity pools , pools for retail clients , pools for professionals , pools for small retail clients like FXCM and MB , pools for institutional accounts , FXCM is showing their liquidity providers only and if u bet 60pound/point as u say , u will not move the market simply if u hit the bid it will be refreshed again to its previous size , also FXCM active trader is a STP not an ecn , which means if u place your order inside the spread it will not be reflected in the quote , if it is an ecn they will show your orders so other clients c them so they can take your orders and trade at them , at least for FXCM clients ...

 

[GammaJammer]

As a rough guide, right now realistically looking at what's going through today across a broad spread of interbank ecns, I could probably if needed sell a hundred million Euros in eur/usd with maybe, oh, let's say max 2 points of slippage from the best bid. It would probably move the price for a few seconds, but it's hardly gonna cause widespread market carnage

And that, in retail / spreadbet parlance would be approximately a £6k per point trade.

But equally if I did this, then waited a few seconds, then did it again, then waited, then did it again etc etc, eventually the trading would propbably start to have an impact. Two main reasons;

1) The market participants on the other side would be getting steadily longer of Euros. And at some point, they would in all probability reach saturation point if I was hitting them quicker than they could offload those euros elsewhere.

2) Pattern recognition algorithms would likely detect that someone was time-slicing a larger sell order, and start to back off the bid a little bit.

Of course, if you stick a few hundred euros into it and it DOESN'T budge, that's a fair indication that there's some pretty decent underlying demand in the market and it's probably gonna go higher once you stop sitting on it....

Basic market making supply / demand stuff this.

Hope this helps.

GJ

 

[tar]

GJ thanks , what about cable how much is there within 2 pips ?

 

[GammaJammer]

not quite as liquid, but could maybe get gbp 25-50m away depending on the circumstances. Problem is, sometimes it's a bit of a liquidity mirage in the ecns. If cable's say 25/27 best rate, people are happy to be a support price 24/28 around in decent size, but if you give a few 25 bids they can turn and run. Not always, and not for the whole amount, but price discovery, for the market makers, and to a certain extent for the customers too, definitely comes AFTER you try to access liquidity.

 

[hoodoo man]

As a rough guide, right now realistically looking at what's going through today across a broad spread of interbank ecns, I could probably if needed sell a hundred million Euros in eur/usd with maybe, oh, let's say max 2 points of slippage from the best bid. It would probably move the price for a few seconds, but it's hardly gonna cause widespread market carnage

And that, in retail / spreadbet parlance would be approximately a £6k per point trade.

But equally if I did this, then waited a few seconds, then did it again, then waited, then did it again etc etc, eventually the trading would propbably start to have an impact. Two main reasons;

1) The market participants on the other side would be getting steadily longer of Euros. And at some point, they would in all probability reach saturation point if I was hitting them quicker than they could offload those euros elsewhere.

2) Pattern recognition algorithms would likely detect that someone was time-slicing a larger sell order, and start to back off the bid a little bit.

Of course, if you stick a few hundred euros into it and it DOESN'T budge, that's a fair indication that there's some pretty decent underlying demand in the market and it's probably gonna go higher once you stop sitting on it....

Basic market making supply / demand stuff this.

Hope this helps.

GJ

Hello GJ.

Don't know if you still post but "tar" directed me to the above comment. If you check my post record, you will see my questions on the CMC markets thread. In short, for a "retail" trader wanting to do 30 - 35 million euros in the EUR/USD at a clip, and without having access to interbank ECNs etc, do you agree that it would be best to execute deals across several providers simultaneously?

Eg. 10 mio at Oanda, 5 mio with a bank MM through STP, 3 mio on CME Euro FX futures, £600pp at CMC Markets, etc?

I've read some of your other posts since tar drew them to my attention, and you seem to have a good background in this area. I'd appreciate any comments.

Thanks,

 

[supremegizmo]

I find is difficult to believe a SB firm would provide liquidity to between £1000 / point as I have rarely heard of a STP architechture connecting SB platform to ECN lqiuidity. Now when I mean £1000 point , if it is one of trade it should be fine but if someone is churning then it would be nightmare for the firm.

 

[supremegizmo]

GJ thanks , what about cable how much is there within 2 pips ?

you can get 30-40 Mill on 2 pips ( roughly 5-9 mill a touch) .. more on London Cash market open ..

 

[DAXJockey]

if you were wanting to move that kind of size on a regular basis, you'd be better off signing up with a PB and getting yourself HotSpot or Currenex - why would you want to let the likes of CMC pull your pants down on execution when for a few bucks per million you can get access to the very best pricing?