Where does the Liquidity of the Forex Market Come From?

In the foreign exchange market, sufficient liquidity makes the financial giant unable to cause huge market fluctuations through individual orders to damage the interests of other investors, which is also one of the advantages of the foreign exchange market. So, where does the liquidity of the foreign exchange market come from?

There is no special exchange in the foreign exchange market, which is the biggest difference between it and the stock market. The foreign exchange market is the OTC market (Over The Counter, non-exchange trading). This market has many participants, including governments, central banks, large banks, enterprises, institutional investors, other financial institutions, and individuals.

It is not difficult to infer that good liquidity must come from good liquidity providers. In the foreign exchange market, the main source of liquidity is the major banks. According to data from the Bank for International Settlements (BIS), in the foreign exchange market, about 70% of liquidity comes from the world's major banks, including Citibank, Deutsche Bank and HSBC.

These banking giants will provide quotations in the form of liquidity providers, and then form an inter-bank foreign exchange trading market by integrating quotations. Brokers can obtain liquidity from liquidity providers in the inter-bank foreign exchange trading market. Ordinary traders provide liquidity.

In addition to major banks, other multi-party market participants also provide liquidity for the foreign exchange market. For example, multinational companies that often need to exchange foreign currencies, companies that need to purchase raw materials from overseas, hedge funds, and so on.