Liquidity tops list of FX concerns for 2019

Investors are becoming increasingly uneasy that they will struggle to get currencies deals done effortlessly, a new survey on trading from JPMorgan suggests. 40 percent of 200 investors polled said liquidity was the number-one daily trading issue,

Three-quarters of investors polled answered that liquidity had fallen under extra strain since introducing new Mifid II regulations in European markets in January 2018. With liquidity concerns focusing on a possible reluctance of dealers to produce steady and competitive pricing of risk through all market conditions.

Liquidity determines how painless it is to get in or out of trades. When it weakens, it can develop into self-reinforcing, making dealers nervous about posting tradable prices. Though the impact is contested, Mifid II is generally mentioned as a culprit for rounds of low liquidity over the previous year because, along with other post-crisis regulations, it can reduce banks’ capacity to hold on to client trades on their balance sheets for substantial time periods.

Flash crashes also impede attempts to get trades done efficiently. Notable recent cases incorporate the first trading day of 2019, when the dollar plunged against the yen, precipitating the Japanese currency to gain 3 percent in a matter of minutes.

In October 2016, sterling also plunged 9 percent against the currency before recovering ground. Analysis from the UK’s Financial Conduct Authority indicates that the move in sterling on that day was down to banks, which is the foundation of the market pulling back.