Liquidity by market center

Although global volume statistics provide a reference point for market liquidity, analyzing trading volume by financial center provides a more specific picture of activity throughout the global trading day, and holds important tactical implications for gauging market movements. The BIS survey breaks down daily trading volume by country.

Asia-Pacific centers (Australia, Japan, Hong Kong, and Singapore) account for about 21 percent of daily trading volume, while Europe is responsible for nearly 53 percent of daily volume (the UK alone does almost one-third of daily global turnover). North America (U.S. 19.2 percent, Canada 2.2 percent) comprises roughly 22 percent of daily turnover. Approximately 96 percent of forex volume occurs between these three trans-global trading sessions.

Overall liquidity fluctuates as the trading day moves on. At no time is this more evident than in the early hours at the opening of the week’s trading, when only a few trading centers (namely Wellington, New Zealand, and Sydney, Australia) are active, and liquidity is at its low point.

This liquidity nadir can often lead to exaggerated moves in currencies, particularly if significant news events transpire over the weekend, as normal market depth is unavailable to moderate impulsive flows. Among the most common over-the-weekend events likely to trigger volatile opening moves (or gaps from the prior close) are unexpected statements from G7 meetings (see “‘G’ meetings:

Do they move the market?” Currency Trader, July 2005) and election results, as was recently the case following the French rejection of the EU constitution.

However, the early hours of the week’s trading tend to be stop-loss hunting expeditions. Such forays tend to occur following sharp moves into the close of the previous week’s trading. In such circumstances, traders caught on the wrong side of a one-way Friday afternoon move (but who are able to hold on through the close) frequently leave stop-loss orders just beyond the extremes of the move. When trading resumes early Monday, market makers Down Under are confronted with a clusterof stop-loss orders just beyond the opening levels, assuming the new open is near the prior close.

The result is frequently an opening flurry of action that sees nearby stop-loss levels triggered, only to see prices subsequently reverse once the stops are placed. When placing orders over a weekend, traders should be prepared for such early, order-driven moves, and this may affect the levels at which orders are placed. Sharp, stop-loss driven, opening moves are also opportunities for traders to leave limit orders at or beyond likely stop-loss levels, potentially gaining better entry levels than might otherwise seem possible.

The weekly opening in the Asia-Pacific session is only one of several periods where session liquidity comes into play. Other flurries of activity regularly occur as major trading centers wind down their trading activity on any given day, taking their liquidity with them. Among these are the London/European close, which occurs around midday for North American traders, and the close of the Chicago Mercantile Exchange’s (CME) currency futures session at 3 p.m. ET, which also coincides with a notable decrease in spot forex trading among major interbank participants.

With a better picture of market liquidity by currency pair and financial center, let’s now examine some of the characteristics of the four major currency pairs, with an eye to how they might affect trading decisions.