Underutilised FX trading window hits liquidity and spreads, new research shows

A strikingly low level of FX trading taking place during the 4pm to 6pm (EST) window is leading to widening spreads and shrinking liquidity among G10 currency pairs, new research from BidFX (an SGX Group Company) shows.

The data shows that from 4:00pm to 6:00 pm (EST), market participants are completing less than 0.6% of their daily FX trading volume, partially due to wasted minutes when pricing engines are restarting – computer systems used to calculate real-time FX prices.

This procedural requirement is coming at a significant cost, effectively reducing the available trading time and thus restricting opportunities to deliver returns. One key element is the near-absence of open markets during the specified time frame. With major financial hubs winding down operations during this time period, the lack of market liquidity and widening of spreads during this window becomes apparent.

The repercussions of this underutilised trading window are particularly relevant as the focus on linking FX trading to equities during the critical 4pm to 6pm US trading session intensifies ahead of the shift to T+1 next May. The move to T+1 requires significant operational upheaval, as existing systems need to be upgraded to ensure faster confirmation and settlement of trades.

“The period between 4pm and 6pm Eastern time is particularly problematic, with liquidity constraints impacting spreads and depth of order book, in turn creating a tough environment for traders exposed to G10 currencies,” said Scott Gold, head of North American sales at BidFX.

“There are very few markets open during these hours and the restart of investment banks’ FX pricing engines at 5pm creates a liquidity gap, making trading during this timeframe less attractive and more costly. One of the main challenges will arise from the unpredictability of FX exposures, particularly for asset managers with non-USD funds scattered across Asia. These firms will have to consider pre-funding – which involves setting aside cash to cover FX trades, primarily during liquid hours when spreads are tighter,” Gold added.

This article was published in Best Execution on 15 December 2023.