Is Your Liquidity Solution Strong Enough to Deliver Frictionless Access to the Wider Forex Landscape?

In a global forex market that’s no stranger to seeing daily trading volumes surpass $7.5 trillion, liquidity plays an invaluable role in maintaining the stability of its currencies. 

In terms of ensuring fast execution, lowering volatility, and leveraging tighter spreads, liquidity helps to reduce slippage for trades, maintain price stability, and lower the gaps between the buy and sell prices of currency pairs while minimizing transaction costs. As a result, liquidity is key for fair pricing for all FX market participants. 

As an institutional investor, is your liquidity solution sufficient for frictionless access to the wider forex landscape and currency pairs that aren’t as frequently traded? Let’s take a deeper look at the pursuit of liquidity in forex:

Navigating Liquidity Drawbacks

There are many risks that broker-dealers face linked to low liquidity, and countering these drawbacks should be central to institutional forex trading strategies. 

While volatile currencies can provide opportunities for institutional traders throughout the FX landscape, rapid price movements can lead to slippage, causing broker-dealers to miss out on opportunities through any delays in executing trades. 

In low liquidity markets, large buy or sell orders can lead to significant price fluctuations that result in price movement issues and larger trading costs. 

Weaker liquidity can also cause wider spreads. Bid-ask spreads can widen in low liquidity environments, leading to increases in transaction costs for traders. These spreads can widen with fewer market participants ready to buy or sell at specific prices, making it far more costly to enter and exit trades. 

Even executing trades can be made more challenging with low liquidity, and broker-dealers can regularly encounter delays and price manipulation among illiquid forex markets. 

These issues can severely impact broker-dealers that may have insufficient liquidity solutions for navigating the more illiquid trading pairs that populate forex. However, we’re seeing evidence of how technology is paving the way for greater efficiency throughout the trading landscape. 

Technology to Beat Illiquidity

As the technology available to institutions continues to grow, we’re seeing many new developments in the way broker-dealers beat illiquidity and the issues stemming from low-liquid markets. 

The emergence of technology like algorithmic trading and artificial intelligence is already building use cases to transform liquidity provision. This has helped to pave the way for comprehensive trading strategies that offer greater risk management and efficiency. 

For broker-dealers utilizing liquidity solutions that lean on these technological advancements, it’s possible to optimize key metrics in efficiency, execution speeds, and pricing precision, helping to build a competitive edge when capitalizing on opportunities. 

When utilized alongside globally focused prime services, liquidity technology has the potential to transform FX strategies for broker-dealers, paving the way for more access to traditionally low liquidity trading pairs and a wider scope for currency movements. 

Building on Data

The importance of data in forex is clear for all broker-dealers. In a market that sees $7.5 trillion in trading volume, data is essential in overcoming significant competition. However, data insights can also be pivotal in navigating low-liquidity markets. 

Liquidity providers and consumers alike have long sought to utilize data over more traditional FX approaches like transaction cost analysis (TCA) and actively seek out analytics platforms to enhance execution processes. 

One of the more popular FX strategies that evolved from this was Liquidity Provision Analysis (LPA), which helps to empower the buy-side to keep an eye on liquidity data on a daily basis. This helps to provide firms with trading updates in real-time, paving the way for stronger decision-making processes. 

Incorporating AI into Liquidity

Global forex markets can be influenced by many different factors, and this can have a significant bearing on liquidity. 

With high volumes of structured and unstructured data for broker-dealers to interpret, the incorporation of artificial intelligence into liquidity insights was always inevitable. 

One example of how AI is improving liquidity solutions for institutions can be found in Horizon Sentinel, a tool developed by FairXchange that’s designed to monitor forex liquidity data analytics and improve trading efficiency through an advanced alert system.

Horizon Sentinel seeks out commercially relevant changes to the liquidity of financial institutions and counterparty activity in real-time, helping to reduce the time firms need to spend on analyzing FX liquidity data. 

As subsets of artificial intelligence like machine learning (ML) become more sophisticated, we’re likely to see more instant actionable insights and alerts help broker-dealers navigate age-old liquidity issues to capitalize on price movements as they occur. 

Accessible Risk Management

Artificial intelligence is also making waves in forex risk management and prediction, helping to improve market liquidity in the process. 

AI algorithms can actively monitor market risks, identify threats, and empower broker-dealers to manage their exposure to risk. 

The analysis of big data can help to detect patterns and emerging trends that humans may be unable to see, helping to build sophisticated risk models to navigate low-liquidity FX currency pairs. 

These algorithms can also predict movements using historical data and real-time inputs, taking into account unstructured information such as satellite imagery focusing on crop performance and retail parking lot data. These can all be democratized to gain a holistic view of the risk associated with a given currency. 

Next-Generation Liquidity Solutions

Data and artificial intelligence hold the key to broker-dealers capitalizing on opportunities throughout the wider forex landscape. 

In incorporating these technologies into your liquidity solution, it’s possible to access cutting-edge risk management solutions to accurately weigh up the potential risks and profit margins associated with low-liquidity pairs as they appear. 

To make the most of the world’s highest-volume market, next-generation liquidity solutions can help broker-dealers thrive and use powerful insights to outmaneuver their competitors when executing trades.