The foreign exchange (FX) market is one of the most liquid tradable assets, with over $5 trillion of daily transactions. The market is decentralised and primarily traded over-the-counter (OTC) rather than exchange based. The FX market is popular for many reasons, though one important reason for individual traders is that it is open 24/6. This means that FX is tradable from Sunday night (Asian market open) continuously until Friday evening (US close). There is only a short period when FX isn’t traded, which is during the weekend. The FX trading week is continuous, unlike cash equities which open and close each day, so the risk of market gaps is only a weekly event.
What is a Market Gap?
A market gap is when a market closes and trading reopens at a different price. In the FX market, the close happens each weekend, when liquidity providers begin trading on a Sunday night (Asian open) the pricing of an FX pair may have changed from when markets closed on Friday. This is likely due to a change in sentiment, potentially due to news or order flow.
It is possible that the market reopens at the same price; however there is usually a slight difference. However there can be a significant difference between the close price on a Friday in the US and the open price on a Sunday.
Example of AUDUSD Market Gap
In the example above, AUDUSD closed on Friday evening at 0.9410 and reopened on Sunday evening at 0.9368, the gap between closing and reopening in the above example is 42 pips.
What happens if there is a Market Gap?
If there is a market gap for a product that you have an open position or order then the gap could affect you. In the chart above it illustrates the gap in AUDUSD and that cross did not trade at any price between 0.9410 and 0.9368.
If prior to the weekend the trader has a long position at 0.9400, they would be unable to close the position until the market reopened on Sunday evening at a lower price, which would then realise a loss. The potential of a market gap over a weekend is a risk for clients who hold positions over weekends or leave limits to be filled.
Pending Order and market gap:
Stops will be slipped to the first available price and limit orders will be improved, as they are treated like a market order being filled at the available liquidity.
Market Gaps during the Week
When there is a major event that can affect pricing; Central bank press conference, social unrest, natural disaster etc. there is also the potential for there to be a market gap. These are less regular than at the Asian open, though it is important to note it is possible.
A good example is when the Swiss national bank announced the Swiss Franc floor, pegging the currency to the Euro at 1.20. There was a significant market gap, with a few intermittent prices traded as limits were filled.
The EURCHF cross traded from 1.10 to above 1.20 in seconds, catching many traders off-guard.
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