Another question, this time regarding liquidity in the FX market.
So I’ve been watching the webinars and I’m still trying to understand the difference between the liquidity of an OTC market and a centralised exchange.
With a centralised exchange, am I right in thinking there’s one simple orderbook, and it contains the order of EVERY participant (big and small) and it’s that orderbook that controls where price moves. So in a stock for example, when we see the price go up, we know that’s because on a collective basis by every single participant, there’s more demand for that stock than there is supply.
However with FX, I understand that we can’t be liquidity providers like in a centralised market, we can only be liquidity takers. So the orderbook(s) that dictates the direction of the spot FX price is controlled by the 15-20 large liquidity providers and not from the true supply and demand of traders like ourselves; is this correct?
If it’s only the liquidity providers that always take the other side of our trade and decide how many orders they want to absorb at each level, doesn’t this mean that they technically control price? Say they wanted the EURUSD to drop in price, couldn’t the LP’s just decide to offer really thin liquidity below the current market price so it forces our sell orders to drive price down in order to get filled?
When we see an asset on a centralised exchange going up in price, we know that it’s due to there being more demand than supply on a collective basis between all participants, and therefore showing us the true thoughts and sentiment of every participant as a whole.
However when we see a currency going up in price, can we say the same? Or is the increase in the currency price just due to the LP’s deciding to offer less selling liquidity at each level, thus forcing the price to increase to seek new sell orders? So the FX price isn’t a function of how much the participants like ourselves want to buy or sell, but how much liquidity the LP’s wish to offer?
And if this is the case, doesn’t this mean that the spot price of currencies is at the mercy of the liquidity providers?
It’s a topic I’m quite confused on so any information from you guys would be great - thanks!