2014issue C1132-34
A liquidity filter for majors, crosses, and exotics
Pair choice is an execution case first. Screen major pairs, currency crosses, and exotic pairs by who actually trades them and how costly a fill is, then read any single ticket as one currency priced in another inside the bank-to-retail over-the-counter ladder.
- A liquidity filter keeps only pairs with enough two-way interest that an order can be completed without outsized implementation cost.
- Seven dollar-inclusive pairs were described as about 85 percent of activity, with EUR/USD, USD/JPY, and GBP/USD together about half of trading.
- Exotic pairs were labeled as dollar pairings of smaller-economy currencies and described as riskier and more expensive to trade than the majors, while pairings that omit the dollar were labeled crosses.
- Most turnover was attributed to governments, central banks, private banks, and multinational firms, and quotes reached the ticket through an over-the-counter ladder rather than a central arena.
From gold convertibility to a managed float
Under the pre-World War I gold standard, the pound was fixed at 113.00 grains of pure gold and the US dollar at 23.22 grains, which capped how much currency a participating nation could issue.
Bretton Woods priced other currencies against the US dollar while the dollar stayed gold-convertible until that convertibility ended on 15 August 1971, after which a managed-float system replaced the prior arrangement. A managed float is a regime in which market prices move but official institutions may intervene when a currency becomes too strong or too weak.
Where two-sided activity clustered
Seven dollar-inclusive pairs were described as about 85 percent of activity, and EUR/USD, USD/JPY, and GBP/USD together as about half of trading at roughly 27 percent, 13 percent, and 12 percent.
For 2010, the related economies were assigned world-output shares of European Union 26 percent, United States 23 percent, Japan 9 percent, United Kingdom 4 percent, Canada 3 percent, Australia 2 percent, and Switzerland 1 percent, totaling 68 percent. A major pair is a heavily traded pairing that includes the US dollar and the currencies of large economies.
Exotics and crosses outside that core
Dollar pairings of smaller-economy currencies were labeled exotics and described as riskier and more expensive to trade than the majors, while pairings that omit the dollar were labeled crosses.
An exotic pair is a dollar pairing against a smaller-economy currency, typically thinner and more expensive to transact. A currency cross is a pairing that omits the US dollar and quotes two non-dollar currencies against each other.
Who supplied the two-sided book
Daily turnover was given as about 4 trillion dollars, set against 2010 US GDP of 14.5265 trillion dollars and year-end 2010 global equities plus outstanding bonds and loans of about 212 trillion dollars, or a full turnover of that stock every 53 days.
Most of that turnover was attributed to governments, central banks, private banks, and multinational firms moving money for financial rather than speculative reasons, with the operational benefit framed as abundant two-sided liquidity. That two-sided interest is what a liquidity filter is screening for before an order is sent.
The over-the-counter ladder
The market was described as over-the-counter with no central arena. Large banks warehouse and quote, electronic brokers distribute prices, midsize banks serve institutions, and retail brokers handle much smaller individual tickets.
Market participant analysis maps official, bank, corporate, and retail layers to see who warehouses risk and who merely takes the downstream quote. That dealer chain is the over-the-counter ladder that sets the spread the ticket actually faces.
One ticket is always a relative price
Currency translation is reading every position as one currency priced in another, so exposure is always relative rather than a single-name bet. After official dollar-centric pricing and the later managed float, a surviving pair is still one currency quoted in another, not a stand-alone name.
All readings on this track · 21 readings
- 1988Classifying primary futures for regime-aware trades
- 1989Odd-lot short interest as a constructed breadth series
- 1989Volume-scaled member versus public short sales as a two-class classroom test
- 1989Evaluating public versus member short-sale breadth
- 1989Lock smoothing inside each short-share before the breadth ratio
- 1989Headline intensity as a three-horizon contrarian filter
- 1989Evaluating technical-fund open interest and daily volatility
- 1990Constructing fund cash and manager-preference filters
- 1990Stock-style futures rules miss index-spread drivers
- 1991Constructing short-squeeze pain from interest and margin
- 1995Contrary sentiment and put-call premiums around large Dow swings
- 1995Act on a pattern change, not on formula signals
- 2002Single-stock futures: contract selection and the margin box
- 2003A crowd fade needs an insider-pattern divergence gate
- 2005A quiet insider tape as a seasonal regime case
- 2006Unwritten pit cues need testable rules
- 2010A gold corrective-phase case after the 1265 high
- 2014Ticket charges, margin carry, and bank liquidity limits
- 2014A liquidity filter for majors, crosses, and exotics
- 2017Test a high-low forecast as one procedure, then cut the book
- 2020Follow or fade as one trading procedure