`Ghost Liquidity' in Currency Markets Is a Concern for the CFTC

(Bloomberg) -- U.S. regulators are keeping a keen eye on liquidity in the world’s largest financial market.

“As far as the foreign-exchange market goes, we’re concerned about any market that loses liquidity,” Andrew Busch, the Commodity Futures Trading Commission’s first chief market intelligence officer, said at the TradeTech FX conference in Miami Tuesday. “It gets to the central question: Where is it? Is it there? Is it pretend liquidity, is it ghost liquidity?”

The ability to buy and sell currencies when needed has been a focus for participants in the $5.1 trillion-a-day market amid stricter regulation and increased electronic trading. Declining liquidity has been blamed for flash crashes in foreign-exchange markets, including the British pound’s plunge in October 2016.

Ensuring liquidity is a key priority for asset managers and hedge funds seeking to execute currency transactions, while Bank of America Merrill Lynch has noted that reduced activity is spurring a battle for market share among dealers. A survey published last year by the organizers of the Miami conference noted that finding alternative methods to source liquidity was among the biggest priorities for many currency trading desks.

“We are for safer markets, but we’re also for markets that function efficiently,” said Busch, who joined the CFTC in April. “We worry about the fragmentation, the different pricing that will occur, the different pockets of liquidity that people have to access.”

©2018 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.