High liquidity is important to all the financial markets and their participants, as it minimizes transaction costs and risks. Some studies associate the lack of liquidity in a market with financial crisis.
The Chase for Liquidity in the Decentralized Forex Market
The Foreign Exchange is an OTC financial market (Over-The-Counter) that operates as a vast decentralized network. In this market, there are many different providers for the same exchange rate, and there is no single quote at any time. Consequently, the quoting for the same pair can vary. That makes the chase for high liquidity even more important.
Liquidity Aggregation
Liquidity aggregation refers to gathering orders from multiple sources and directing them to a large executing entity.
A retail aggregator combines small retail trades into larger orders that can be filled by a large market participant. These larger participants have direct access to the vast liquidity of the ECN network. Retail aggregation offers advantages to every market participant:
- Having access to the best possible spreads at any time
- Trading with a minimal slippage on order execution, especially during news releases
- Easily executing large order sizes
- Continuously diversifying order execution risks via the use of several liquidity sources
