Forex Traders & Brokers have been given shock by Liquidity Providers that they won’t be able to provide liquidity for exotic Gold & Silver Pairs XAUUSD & XAUEUR. Many Forex Brokers have received a message from their Liquidity Provider notifying that they are facing liquidity issue on XAUUSD & XAUEUR and these pairs have been put on “Close Only Mode”.

[ccpw id=”832″]
Covid-19: Gold & Silver Pairs are on Close Only Mode
Covid-19: Gold & Silver Pairs are on Close Only Mode

One of client shared the message copy on terms of anonymity:

Dear Valued Client,

Please note that Liquidity banks are facing liquidity issues on XAUUSD & XAUEUR and we have set them on close only mode for now and also note that spreads are very wide at this time.

There has been a breakdown in XAU EFP (exchange for physical) which is the difference between CME futures and OTC spot because refineries are shutting down and it is impossible to move metals.

This has caused a blow out in spreads. As we provide aggregated liquidity engine to all our clients and it hits us hard as Liquidity Providers are filtered out, we’re addressing this by putting pressure on our existing LPs to quote tighter and adding more liquidity streams further.

We will endeavour to offer normal trading conditions further as soon as our bank feeds come back to normal.

What is Close Only Mode in Forex Trading?

The Close Only Mode is a trading restriction imposed on traders at the time of liquidity crisis in currency pairs or trading instruments like Gold, Silver, and Crude etc. Here are features:

  • Traders can only close the open positions
  • Traders can’t open new positions
  • Close Only Mode is imposed primarily on 2 conditions:
    • When there is Liquidity Crisis in any individual or group of security instruments like Forex currency pairs, Gold, Silver, Crude, Indices, CFDs, and Stocks etc.
    • A Trader’s Account Balance or Margin falls below a pre-defined threshold by the Forex Broker.

When is the Close Only Mode restriction lifted?

  • The Close Only Mode restriction is lifted as soon as the liquidity in given security gets back to normalcy.
  • It’s pretty obvious, that the Close Only Mode restriction in low account balance or margin cases is lifted as soon as the balance or margin increases by way of either additional fund infusion or unlocking margin by closure of opening positions.

Liquidity Crisis due to CoronaVirus / Covid-19 Pandemic

The Covid-19 Pandemic caused by Corona Virus has sent the economies and markets for a toss across the world. Stock Markets, Forex, Crude, Gold, Commodities, are all falling for weeks now. And every time a crisis hits the securities markets, Liquidity vanishes. And this has happened to Gold & Silver now.

The miners have stopped the Gold & Silver mining and the supply chain has been disrupted due to lockdowns across countries and cities. This had a cascading effect on Liquidity on Gold & Silver pairs.

Who are Forex & Crypto Liquidity Providers?

Forex & Crypto Liquidity Providers are the brokers of brokers. They just take the opposite side of trade brokers send to them. They are the backbone of every successful and flourishing securities markets like stocks, Forex, crude, gold, silver etc. Without liquidity no market can survive.    

Role of Forex & Crypto Liquidity Provider

As anyone familiar with Forex trading knows, trading is a zero sum game where if one party makes money another loses it and vice versa. When Forex & Crypto Liquidity Providers take the opposite side of the trade of traders or brokers, they take the risk of losing money if the traders make money. The LPs offset this risk by “hedging” the positions somewhere else.

Hedging is easier when markets are liquid but as the liquidity reduces or vanishes on occurrence of unforeseen events like Covid-19 pandemic, the “hedging” gets very difficult. The volatility adds to the woes of traders, brokers and liquidity providers as it’s really hard to understand the markets and profits and losses are erratic.

No sane individual, business or institution like Forex traders, brokers, liquidity provider would want to risk their money at the time of low liquidity and higher volatility   

We have written a detailed blog on Liquidity Providers and how they make money. You can learn more about Liquidity Providers here.     

Conclusion

It’s unlikely the Liquidity Crisis may hit other Currency Pairs but unusual things are happening this time. It will be interesting to see how and when will be the liquidity in XAUUSD & XAUEUR returns to normalcy.

Leave a Reply