The Three Different Market States of Cross-Border Liquidity

In normal conditions, FX markets are reliable and quick. Major currency pairs trade with spreads measured in fractions of a basis point, with near-instantaneous execution. Quoted prices are clear and large orders can be filled without meaningfully moving the market. The markets are stable, and the infrastructure hums along so smoothly that it could rock you to sleep.

This regime is sustained by two reinforcing conditions: Sufficient systemic liquidity and the absence of meaningful stress.

Systemic liquidity is the baseline depth of a market. It’s animated by the number of active participants, the volume of natural two-way flow, and settlement infrastructure maturity.

Markets with high systemic liquidity can absorb shocks that destabilize thinner markets. The EUR/USD pair, with trillions in daily volume and participants in every major financial centre, exemplifies this: It’s almost never illiquid.

But even the deepest markets experience periods of reduced activity: during holidays, between the closing of one major session and the opening of another, or in the minutes following a significant data release. Normal regime liquidity is robust but not indestructible.

For much of the world, particularly in emerging and frontier markets, normality is a relative concept. A market that is "normal" for Nigeria or Vietnam operates at a baseline level of systemic liquidity that would be considered stressed in a G7 context. The spread on USD/NGN in every day conditions is not the spread on EUR/USD under the same regime.

When the markets are under stress or worse yet in crisis, these differences become all the more apparent.

Market Stress: When Liquidity Becomes Unreliable

Stressed conditions happen when exogenous pressure: geopolitical events or unexpected institutional flows meet a market that cannot easily absorb it, leading to widening spreads and quote discrimination from market makers, who start pulling prices in larger sizes or for longer durations. Execution times lengthen and transaction costs rise.

In stressed conditions, the relationship between price discovery and execution reliability starts corroding at the margins. A price quoted at T may not be available at T+200 milliseconds. Uncertainty about the market makes holding inventory more expensive, so liquidity providers reduce their risk appetite and reprice.

While volatility happens all the time and is, theoretically, the signature feature of a dynamic global market, a currency pair with shallow systemic liquidity is more vulnerable to exogenous stress.

This is something that can be felt all the way down the financial ladder: The macro shock that might widen EUR/USD spreads by two basis points might widen USD/TRY spreads by 200. The latter doesn’t happen because the shock is bigger, but because there’s less liquidity beneath it to absorb the blow.

Market Crisis: When Liquidity Collapses

From a market perspective, crisis conditions are dramatically different from stress.

In a stressed market, liquidity is expensive. In a crisis, it can become entirely unavailable, or else it’s only available at prices no rational actor would accept. Markets widen, and prices that seemed orderly before jump discontinuously as participants refuse to quote intermediate values.

Central banks will often attempt to intervene, and more often than not, settlement begins to fail.

The Swiss National Bank's removal of the EUR/CHF floor in January 2015 caused the pair to move as much as 30% within minutes, blowing up multiple retail FX brokers and causing settlement failures across the industry. Turkey's lira crises in 2018 and 2019 saw regulators place sharp limits on the offshore swap market, causing offshore lira borrowing rates to spike to levels that made currency access effectively prohibitive for foreign institutions at the most acute periods.

This is the condition most relevant to markets with low systemic liquidity and high exogenous vulnerability. Nigeria illustrates the dynamic well. Through much of the 2010s and into the early 2020s, its FX market operated with limited systemic depth: Few participants, constrained two-way flow, and a settlement infrastructure that struggled under pressure.

When oil prices fell or broader emerging market stress arrived, the thin liquidity that existed in normal conditions compressed sharply, pushing the gap between official and parallel rates to levels that shut out many participants.

Three States, Two Different Worlds

Stability. Stress. Crisis.

What emerges here is a two-axis map of the world's currencies. On one axis: Systemic liquidity, the structural depth of the market under normal conditions. On the other: Exogenous vulnerability, the degree to which the market is exposed to the kinds of shocks that trigger regime shifts.

A market like the United States sits in the upper-left quadrant: Very high systemic liquidity, very low exogenous vulnerability. The system remains predictable except under extraordinary conditions.

A market like Nigeria sits in the lower-right: Thin systemic liquidity, high exogenous vulnerability. System shocks find it without much warning, and there is not much that can be done to absorb the hit.

Building for these markets requires understanding which regime you are in at any given moment, and having the risk management and operational architecture to function across all three.