Trade Mechanics

Given that there is in excess of $2 trillion a day being traded on the forex market, it’s easy to believe that there will always be enough liquidity in the market to do what needs doing. Sadly, belief doesn’t negate the truth that for each and every buyer in the market, there MUST also be a seller, otherwise no transaction can occur. If an order is too big to handle at the current price, then the price has to move to a point where there is enough open interest to cover the transaction. Each time you see a price move even a single pip, it’s an indication that an order was transacted or executed which “consumed” the open interest at its existing price. Prices can move in no other way.


As we discussed previously, each bank lists on the Electronic Broking Service how much and at which price the bank is willing to transact in a given currency. It’s important to note that Interbank participants are under no obligation to enter into a transaction if they feel it is not in their best interest. Remember, the Interbank has no “market makers;” only speculators and hedgers.

You may notice that there is generally open interest of different sizes at different prices. Each of those units represents an existing limit order; in this example, then, each unit is representative of $1 million in currency.

Knowing this information, say a market sell order is placed for 38.4 million, then the spread would widen instantaneously from 2.5 to 4.5 pips simply because there would not be any orders that were between the 1.56300 price and the 1.56345 price. The spread wasn’t increased by any broker, bank or market maker; it was a natural byproduct of the sell order that was placed. Provided there were no additional orders, the spread would continue to remain that large. Fortunately, at some point in time, someone somewhere will look at a price point somewhere between those two figures as an ideal opportunity and place an order. Such an order will either consume (remove) interest or increase it; the action it takes will largely depend on whether or not it’s a market order or a limit order, respectively.

You may wonder what might have happened if a sell order for 2 million is placed, just a split second after the 38.4 million order hits? That order would be filled at 1.5630. You may ask why was that order “slipped?” Because no one was willing to take the flip side of the deal (at 1.56320). It’s not that anyone was trying to cheat the trader; again, it was merely a by-product of the order flow.

The more interesting question would be what if all of the listed orders were canceled suddenly? In that case, the spread would increase to the point at which there would exist bids and offers. Now, that might be 5, 8,10 or even, say, 100 pips. It will widen to whatever is the difference between the bid price and the offer price. Nobody came in to “set” the spread; they merely refused to enter into a transaction at any price between it.

You can’t force an order into existence that simply doesn’t exist. Regardless which market is under examination, or what broker is attempting to facilitate a transaction, it is nearly impossible to avoid both spreads and slippage. In the trading world, they are simply a fact of life.