Nicholas Pratt
Nicholas Pratt

Leaving it to the specialists: Overcoming liquidity constraints in FX

Access to liquidity has always been a primary concern for FX traders – from ensuring there are the necessary credit lines to the technology needed to locate and access the various venues. In recent years the dynamics behind liquidity provision have changed markedly and as Nicholas Pratt discovers, the competition has become more diverse.

A number of the traditional market making banks have stepped back from the FX market, either unable to keep up with the investment in technology needed to keep pace with the competition or put off by the capital requirements from various regulations that limit the amount of capital they can keep on their balance sheets. At the same time there has been an emergence of specialist liquidity providers, non-bank market makers that have been able to fill in the liquidity gaps left by banks’ withdrawal, especially in some of the more illiquid areas such as emerging market currency pairs. CROSS-CORRELATION According to Hugh Whelan, Global Head of Liquidity Management, EBS Direct, there are numerous factors that have enabled the non-banks to enter the market. One important factor is that they leverage cross-correlated models, using asset classes other than FX to hedge their positions manage risk and therefore offer better prices and spreads than the incumbent banks. There has also been...continued

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