The goal of our leading chart is to add concrete estimates of how FX liquidity fluctuates by the hour, as the three major trading centers – London, New York, and APAC centers – continuously administer global FX exposures during their respective hours of operations before passing such duties to the next region. This process begins with traders in Sydney or Tokyo at Sunday 22:00 GMT and ends when the New York desk closes the week no later than 22:00 GMT on Friday. Of course, not all market participants have this geographic rotation and instead rely on traders that come at different times of the day within the same jurisdiction.
As major announcements take place, FX liquidity normally is adequate to handle the volatility associated with macro economic surprises. For example, U.K. interest rates and inflation numbers are released when the hourly ADV is ample, with some US$267 billion and US$405 billion exchanging hands hourly. Clearly, these sizable sums don’t just stem from London demand, but are rather the result of Tokyo closing, much of western Asia, Africa, and all of Europe being open for business. Also, during the most volatile of all announcements, U.S. Non-farm payrolls the first Friday of the month at 13:30 GMT (8:30am ET), the combined FX volume of London, the US, and part of EMEA makes for a formidable market with some US$650 to US$800 billion changing hand until the 4PM London fix.
There are, of course, exceptions for the adequate liquidity rule. FOMC is generally released at 19:00 GMT (2PM ET), and if the U.S. Fed deviates in any way from what the market expects there are sure to be liquidity dislocations as more buyers than sellers for a currency (or more sellers than buyers) chase a scarce supply of liquidity at given prices. In these illiquid instances, prices skip and spreads widen more than the norm. The notion of prices don’t trade linearly (e.g., that prices can and do skip) dumbfounds novice traders, as limit orders are filled at prices other than what he or she assumed they requested at the time of setting the order. And in these instances, the culprit for a poor fill is probably economics (as in supply and demand), not one’s executing bank.
Lest you forget, mind the “witching period” around the time the U.S. closes shop during the week (Monday to Thursday) and before Tokyo opens in earnest – GMT 22:00 to GMT 00:00. It was during this witching period that cable (GBPUSD) suffered a flash crash, dropping 6% in a matter of seconds in late October 2016.
The regional breakdown and changes in ADV over the 2004 to 2016 period suggest that this daily liquidity curve is growing over time, in some places – like London and parts of the APAC region – doing so faster than elsewhere. These hourly ADV estimates which we constructed using BIS country-by-country net-gross stats, can also prove handy as clients go about fine tuning their systematic strategies or algos over periods longer than a few hours.