Monday, September 28, 2015

FX Liquidity Is Tumbling To Dangerous Levels

"Back in the summer of 2013, the Treasury Borrowing Advisory Groupmade a very explicit plea to the Treasury (and the Fed): please help us, liquidity in bond markets is plunging; the plea was so loud the Fed - whose monetization of Treasurys remains the primary culprit for the collapse in fixed income liquidity - promptly announced it would first taper, and then completely halt QE (at least until such time as Congress provided a generous surge in monetizable debt).
It took the peanut gallery a few years to pronounce that "everyone is worried about bond market liquidity", even though this had been clear for years to anyone who actually traded bonds in these broken markets.
A far more concerning development over the same period has been not so much the evaporation of equity, or debt, liquidity but that of the one "market" which central banks have no qualms about intervening on a daily basis: currencies. A recent example of just how thin liquidity had become in FX took place on March 18 during the infamous USD flash crash, when just after the market close, the USD index went, well, "crazy"

Furthermore, as we also discussed in the past year, one of the primary reason why FX liquidity has imploded is that after soaking up commodity, bond and equity markets in the past several years, HFT firms such as Virtu decided to make FX their latest trading arena..."


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