The Low Liquidity World: Why FX Markets Can Look So Inefficient

What does it mean for a market to be efficient?

You can get extremely wonky about this extremely quickly, but for our purposes, an efficient market is one where you can complete a transaction with relatively little friction and expense.

By this standard, the global FX market is pretty efficient. Well over $9 trillion changes hands every day across almost every possible currency.

Zoom in a little though, move from "the market" to individual corridors, and this efficiency starts to look a little less obvious.

Most countries on Earth don't have currency markets liquid enough to support direct trades between them. These markets depend on FX brokers and chat trades, small liquidity providers and one more thing we'll get to in a moment. We wrote about this at length in our recent report, The FX Iceberg, and in it we called this state of affairs The Low Liquidity World.

When you look into it a bit more deeply, you quickly discover that this world represents most of the countries on the planet.

Which raises a strange question, how is it possible that we built one of the most efficient financial markets ever made, while simultaneously creating a world where most of the components of that market are wildly inefficient?

The answer is that solving the first part didn't ever require solving the second.

Let's say you want to move money from Currency A to Currency B, do you actually need the corridor between them to be highly liquid? Not really, as long as you have a way to bridge the gap, some third currency that both sides want to hold.

A currency like, say, the dollar.

Building an illiquid world

How many currency corridors across the planet do you suspect are actually liquid?

50?

60?

If you've worked in FX long enough, maybe you are a bit more conservative, something like 10 or 15.

While there is no precise, official number, based on our research, the answer lands in the low single digits. Fewer markets than you can count on one hand can operate truly independently from the dollar.

How did this happen?

Remember, the goal of the market is to move money across the whole, not optimize every, single part. Given this, the architecture that arose makes a lot more sense.

The dollar was already an enormously important currency even before World War II. Bretton Woods put it at the very heart of the postwar monetary system. Many currencies were pegged to the dollar, and the dollar was pegged to gold.

When Bretton Woods fell apart, the dollar's place in the world's economy did not.

At this point, everyone was using the dollar for something -- governments, businesses -- if money needed to move, it was often easier for that money to move through dollars.

The dollar provided deep pools of liquidity that countries with thinner markets could tap into. The sheer volume of flows made each transaction a little cheaper and a little faster, it also drew more counterparties looking to get in on the action. As economies grew and FX volume began to spike, USD became increasingly baked into the very fabric of the market, and increasingly attractive to everyone involved.

Strength follows strength, until we arrive at today where USD sits on one side of 89.2% of global FX trades.

Let's compare that to the non-dollar markets:

Largest non-dollar currency pairs

Source: BIS Triennial Central Bank Survey, April 2025. Shares are of total global OTC FX turnover.

One of the largest and arguably asset markets in the world is propped up almost entirely by a single carrier currency. This would be like discovering that equity markets are only held together by the fact that people keep trading Apple stock.

Depends on who you ask

So what does this all mean?

Depends on who you ask.

For "the market," whatever that means, not much at all. Global FX remains highly efficient. Money moves through large economies quickly and at a relatively low cost.

But once again, the real action is occurring at the corridor level.

• In thinner markets, which make up most of the world, transactions can cost dozens of basis points.

• Push hard enough against almost any corridor and available liquidity might disappear completely.

• In much of the world, people are still making FX deals over Telegram chats.

• Transactions that take minutes across the G7 might take days across MENA or parts of Latin America.

At the same time, these same countries are building genuinely exciting infrastructure to try to side-step the problems created by concentration. Colombia has Bre-B, many African countries are involved in developing PAPSS. Similar projects are cropping up across Asia and the Middle East.

None of these solve the underlying malady, but all of them show the level of innovation that is driving the market forward.

Then there are stablecoins.

Stablecoins may be the most ambitious recent attempt to create something approaching a “truly” efficient global FX market, an asset that doesn't require correspondent banks and is not beholden to much of the machinery that created the world we live in today.

And after nearly a century of building around the dollar, what did we decide to put on top of this new global infrastructure?

Mostly dollars.

Roughly 98% of stablecoin value is dollar-denominated.

Some things never change.

We spend much more time on the Low Liquidity World, how to measure liquidity quality, and the machinery necessary to build modern rails, in our report: The FX Iceberg: Understanding Cross-Border Liquidity.