I recently wrote an article entitled The New Forex Reality. I have since come across another article that confirms what I have been saying in an evolving market where you need to be aware of how it is changing so you can avoid the flash crashes and survive to trade another day. This is a timely topic ahead of the U.S. March employment report to be released on Good Friday in what will essentially be an illiquid market.
All I had to do was look at the price action and a chart to come to my conclusions but some added insights from the article below supports my case that liquidity is not what it used to be. It also brings up a point that I had planned for a follow up article, which is that regulators have reduced banks' ability to take risk and that algos have replaced bank spot traders as liquidity providers, who no longer feel obligated to make two-way quotes during frenetic times. This has added to pockets of illiquidity and volatility in the forex market.
This article from Zerohedge confirms what I wrote:
From the article:
The sharp swings also raise a now-familiar complaint from investors: Regulations brought in after the financial crisis have dried up the liquidity in markets, by crimping banks’ ability to carry risky bets on their balance sheets.
To sum up, this is the new reality, not only in forex markets but in all financial markets. We have heard the same from those in the Treasury market, where there are air pockets when liquidity dries up. So keep this in mind as I suggest the move from low volatility to higher volatility markets is here to stay for the time being. It also says to be on guard for a surprise and beware of reactions afterwards as they can carry farther than logic suggests, depending on the state of the market at that time.
Jay Meisler, founder
Global Traders Association
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.