I’m encouraged by all the answers so far and appreciative of the sharing and wealth of knowledge here. I especially like your mathematical breakdown. Though I’m new to Forex so please enlighten me if I’m wrong in any way, but… if Forex is decentralized ( as you say) then would that not mean that the streams of liquidity are localized to their respective sources thereby insuring that one does not actually have access to the entire $271.4 billion in the EURUSD but only some fraction of it that would in turn depend on how many streams of liquidity and/or which stream your brokerage house actually has access to? If this is true then that would seem to limit the number of lots per tick even further. No?
Exactly. I illustrated the most ideal scenario to show that the hard ceiling for position sizes is not as monstrous as other people believe it to be.
At the interbank level, $5 million trades are commonplace. Larger trades might be filled in two or more parts. Filling a $50 million trade might involve several partial fills.
Here’s a portion of the “diary” of a London bank trader, which may be fiction — but, it’s realistic.
Someone here on the Forum posted the link to this, but I can’t remember who, and I haven’t been able to locate that post. Anyway, thanks to whoever originally posted it.
In these paragraphs, our trader summarize the first 30 minutes, or so, of a typical work day.
What have I done so far? Bought 50m gbp/jpy at 143.48 Bought 25m eur/gbp at 0.90815 Sold 2m eur/gbp at 0.9082 Bought 27m eur/gbp at 0.9080 07:25 Netting the 3 eur/gbp deals out shows me having bought 50m Euros at 0.908067. “so what do we do now?” I ask Meat, he looks at me a touch blankly. I point at the order manager system on my monitor, showing me all the orders that we are working for clients. One of them, my friends order to buy eur/jpy is blinking pink and red, indicating that it is very close to being triggered. The notes column reads ‘Rich, Smalls Discretion, partial ok’, which means I am watching it personally, I have a little bit of latitude on the level to fill the guy at, and if we get some but not all of his order done that’s ok as long as we call him. I see realization dawning on Meat’s face. “Err - we need to buy more eur/gbp”. “Correctamundo” I reply, doing a poor impression of Samuel L Jackson in Pulp Fiction. “Check out the big brain on Meat!!. So how much more? Quickly now”. Meat taps a few numbers through on the calculator. After a couple of goes at it he gets the right answer. Just over 5 million more. 5 million is a standard amount quoted by the voice brokers all the time. Price at the moment is a touch higher again. “82/84, two four, two four in a fiver, two four” he repeats. I thumb the talk button on the speaker for the guy at Icap and say “Take five Parrot” (Parrot is the broker). “Five at 84 George” He replies. “It’s Rich actually. Thanks mate”. Meat recalculates the eur/gbp average immediately. I bought 55 million Euros at 0.908097 average. And now it’s easier to see what I’ve done.
I bought 55m Euros at 0.908097, meaning I sold 49.993 million gbp (55 x 0.90897). But I had previously bought exactly 50m sterling against yen at 143.48. So the sterling amounts from all those trades almost exactly netted out, leaving me long 55 million Euros against yen, at a price of 130.29375. I look up at the screens again. eur/gbp is going nuts. 85 paid, 90 paid, 98 paid, 0.9100 bid, 0.9110 bid. It’s dragging everything else with it. And gbp/jpy is falling through the floor. Some uk news must be out. One of the bond traders is pasting something into our internal chat session for all the traders here. Rumours hitting the market of the chancellor being called to a meeting with Moody’s, one of the ratings agencies. The market knee-jerk assumption is that the UK’s perfect AAA sovereign rating may be about to be cut and sterling is selling off on the back of it. With dollar/yen sidelined on this news and hardly moving, but euro higher as a result of all the eur/gbp buying, euro/yen is of course climbing steadily. I quickly phone my guy in New York back. “Hi mate - you’ve done 55 at twenty nine and a half so far. Real low’s been around 32 but I got a break and legged into some. Now Darling (the UK Chancellor), is allegedly meeting Moody’s and euro sterling’s off to the races. Want me to scoop the other ten in for you?” (his original order with me was for anything up to 65 million). “Nah” comes the reply. “Just work it back down there again that’s cool. Thanks man. Book em at 31 dude and thanks for hooking me up”. His drawl so laid back he couldn’t possibly hail from anywhere else than California. “Pleasure mate. I’ll call you if it all boots off. Go back to sleep”. “Later he says”. He hangs up.
Filling a large order through a series of partial fills is sometimes called “legging into a position”. But, in the scenario above, “legging in” has a different meaning: it refers to the way our trader used GBP/JPY and EUR/GBP trades (the “legs”) to accumulate a large position in EUR/JPY, so as to fill most of a $65 million EUR/JPY order for a NY hedge fund.
If you want to read the whole thing, here are the links (it’s in two parts):
Trade2Win - Active Trading & Forex Community and Trade2Win - Active Trading & Forex Community
.