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Foreign Exchange

Spreads and liquidity

The anecdotal evidence suggests that liquidity is dropping off and that as it does, the market’s major liquidity providers have been tightening up their spreads. An interesting note sent out by RBS’s quant solutions team at the end of October suggested that the banks have, so far, largely been getting things right in matching the spreads they have been quoting to the market conditions.

The analysis compares spreads and volumes on EBS and Reuters in September and October 2007 and 2008.

Currency pair Percentage increase in transactions Percentage increase in average bid/offer spread Percentage increase in volatility of average bid/offer spread

Currency pair

Percentage increase in transactions

Percentage increase in average bid/offer spread

Percentage increase in volatility of average bid/offer spread

EUR/USD

92

60

336

USD/JPY

58

60

158

GBP/USD

28

293

5,500

AUD/JPY

81

127

1,212

USD/MXN

36

467

715

USD/ZAR

75

135

412


Source: RBS Quant Solutions, citing data from RBS, EBS and Reuters RBS points out that an increase in transactions does not necessarily equate to an increase in liquidity.


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