“Are you telling me that my watch knows something that I don’t about foreign exchange?”
Not technically. But your timepiece can be a powerful ally as you seek to reduce transaction costs incurred when executing trades in the 35 most widely traded currency pairs.
Although the FX markets are theoretically open for business from 2 pm Sunday to 6 pm Friday Eastern Standard Time (EST), indiscriminately executing trades throughout this window fails to leverage the liquidity benefits of both local markets and the major FX trading centers. In other words, the bid/ask spread on $20 USDTWD is not the same at 3 pm and 10 pm EST—the trade should be executed at 10pm EST. This will reduce the spread paid by leveraging the local market liquidity.
From BIS data in 2007, London and New York alone make up 51% of all currency volumes (34% and 17%, respectively). Therefore, the window when London and New York normal trading hours overlap (about 7 am to 11 am EST) is the optimal execution time for the most currency pairs.
Put aside the theoretical generalizations mentioned above, and let’s organize the best time to execute each currency and put it in a nice, neat table that you can bookmark (or print) and keep on the trading desk.
You should also pay particular attention to Emerging Market (EM) currencies. They have the highest transaction costs and your investors will receive the most benefit from trading during liquid hours.
Isn’t it time that nice watch of yours started paying for itself?