Inefficiency Of The 24 hour Forex Market

The forex market is truly unique. It operates a 24 hours a day for 5.5 days per week. It is open on Sundays as well because the Tokyo and Sydney markets are starting their week. It is decentralized as there are many different mini exchanges where forex transactions can occur.

The forex spot transaction can be done on on various platforms including EBS and Reuters Dealing. Spot forex transactions can be done on the Currenex or Hotspot platforms. Transactions can be done over the phone with various banks. Each market can have it’s own unique pricing and be off by a few tenths of a pip, or even a few pips for some of the more illiquid currency pairs. Each platform can trade at different prices during news releases.

This inherent inefficiency can generate many different arbitrage opportunities.

Forex vs Stocks

One of the advantages of a 24 hour market is that the fundamental value and sentiment shifts can be gradually priced into the market over a 24 hour consecutive trading session. This give you fundamental value and sentiment mispricings that can occur because of various news releases. Because they can occur and price themselves into the market gradually over the course of the day, it provides trading opportunities that do not exist in other markets.

Because in the stock market if there is a fundamental value or sentiment change, it all needs to be priced in within six and a half hours. Because the repricing needs to occur within a shorter time frame, there exists less of a chance for you to catch them, although many of them still exist as there are hundreds and thousands of various stocks for which the mispricings can occur, as opposed to only 20 or 30 currency pairs.

Also, with stocks, if the news occurs outside of normal market hours, then the market will tend to gap to the new perceived pricing. It doesn’t give you much of an opportunity to profit if the news occurs outside of normal market hours.

With forex, since it is a 24 hour market, if news happens that changes the fundamental value, then yes the market can attempt to spike to its new value, but there are many occasions where you still have an opportunity to jump in since the market is always trading 24 hours a day.

With stocks, the biggest chunk of order flow needs to occur within the 6.5 hour time frame when the market is open. While in forex the order flow can be spread out around 24 hours so the mispricings can get corrected much slower.

Stops, Option Barriers Get Tripped

Since forex is a 24 hour market, the participants can trip the stops and option barriers at any point within the 24 hour cycle. While the market players sometimes prefer for attack the stops and options during the more liquid times, but other times the market players can just choose to make a go at them during the late NY sessions, Sydney session, or Asian session. Those tripping of the stops and option barriers can create additional mispricings that can be taken advantage of. There can be many mispricings that occur during these time periods while the U.S. equity markets are closed.

These are the various inefficiencies that occur within the 24 hour forex market. Every market including stocks, futures, have their own inefficiencies. But the forex market inefficiencies are very cool indeed.

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