The Value of e-FX Bank Streams (June 2017)

The Value of e-FX Bank Streams (June 2017)

Mainstream and industry press have written widely on the gradual withdrawal of banks—the traditional primary liquidity providers—from the spot FX markets over the past few years. The typical narrative is that reduced appetite for risk, controls on capital at banks, as well as juniorization of dealer staff have all contributed to this withdrawal. The general consensus seems to be that (a) liquidity is getting more expensive, and (b) while spreads are narrow in times of normal volatility, in times of market stress dealers effectively pull away from the markets, contributing to extreme volatility and events like flash crashes.

In this research note, we aim to contribute to this discussion by reporting data on how often banks actually “step back” from providing meaningful liquidity to the FX markets— individually and (more importantly) as a group. We find that events in which banks actually stop providing liquidity are exceedingly rare.


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