Puddles and pools: how to optimise FX liquidity
Fragmented pricing makes it hard to compare and analyse market-makers, say HSBC quants
Liquidity pool optimisation is critical for the success of any trading operation. Historically, the main metrics that trading desks would review to assess the quality of their liquidity pool were average spread, depth of book and fill rate.
As foreign exchange liquidity has become increasingly fragmented, mass aggregation has deteriorated the quality of market liquidity due to the mirage created by liquidity providers that replicate the pricing of each other, dubbed non-orthogonal providers.
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