Philip Brittan Bloomberg L.P
Philip Brittan Bloomberg L.P

Pulling in the reins - offering liquidity on a selective basis.

First Published: e-Forex Magazine 22 / Viewpoint / January, 2006

There is a subtle yet dramatic change occurring in the FX world. Banks are taking back control over the provision of liquidity in the face of increasing risks and decreasing margins. Banks are taking control by pulling liquidity from multi-bank portals and focusing on channels that support a direct relationship with their clients. And one of the major risks leading to this change is the “liquidity mirage”. Simply put, the liquidity mirage occurs because for all the enormous size of the FX market, it actually supports less liquidity than is on offer on all the single- and multi-bank FX portals. The underlying interbank market may be showing a bid at a price in say 10 million EUR but this price is then used as the foundation for banks’ pricing engines which offer say 30 million at that price through multiple channels. Therefore clients with 5 banks’ offerings in front of them may be seeing EUR 150 million all based on the same 10 million EUR bid.Clearly, this situation could lead to a...continued

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