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The forex market is the largest market in the world in terms of size and liquidity, with over $5 trillion worth of currencies traded globally every day.

The Largest Market in the World

The stock markets across the world have different central exchanges where all the transactions are processed. But, in the case of the forex market, there is no central exchange (physical counter) where the transactions can be processed. In fact, this market runs electronically, connected by a network of banks. Hence, this enables traders to trade in the forex market from anywhere in the world.

Currency Distribution in the Forex Market

There are about eight currencies on which most transactions take place. Out of these currencies, the US Dollar dominates with around 85% of all the operations in the forex market. Next up in the line stands EUR, which is then followed by JPY, GBP, AUD, CHF, CAD and NZD. A graphical representation is given below.

Here, the sum of all the variables totals to 200%, as currencies are traded in pairs.

Liquidity of the Forex Market

Liquidity is simply the possibility to square off a position smoothly and quickly without causing the market drastic move. In simple terms, liquidity is the level of supply and demand in the market. So, when there are large numbers of buyers and sellers in the market, we can call this market to be highly liquid.

Forex market is the most liquid market in the world. This implies that the forex market constitutes a large number of participants (buyers and sellers). With high liquidity, one can liquidate their positions much faster at their quoted price. Moreover, high liquidity causes the prices to move smoothly, gradually, and in small steps. Hence, this even leads to more consistency in the quoting of prices.

Who Provides Liquidity to the Forex Market?

A liquidity provider is a market broker or institution which acts as a professional market maker, working at both ends of the currency transactions.

Several types of market participants provide liquidity to the forex market thereby increasing the forex liquidity volume. These include central banks, major commercial and investment banks, hedge funds, foreign investment managers, forex brokers, retail traders and high net worth individuals.

The top liquidity providers in the foreign exchange market are known as Tier 1 liquidity providers. These consist of the largest investment banks with large forex departments who provide buy/sell quotes for the currency pairs that they make markets in, often providing their clients with a range of other services.

The Importance of Liquidity in Forex

The liquidity in forex trading is a key factor in making a trade profitable. Having greater liquidity in a financial market enables an easier transaction flow and makes price more competitive. The provision of liquidity is important for well-functioning asset markets and in the case of forex trading, this is where the need for forex liquidity arises. One of the most important aspects in trading is the presence of a liquid market.