A word that’s been buzzing around the Football index community a lot as of late.
If you don’t have much experience with financial markets, then it might be something you’re struggling to get your head around.
What is liquidity? Why is important? What does it mean for FI and my trading?
These are all question which a lot of traders are asking themselves.
Fear not. I’m here to answer your liquidity questions.
What is liquidity?
First of all, lets look at what liquidity actually is.Embed from Getty Images
The liquidity of an asset, such as a player on FI, can be defined by it’s ability to be converted into cash quickly without losing it’s value.
Assets that can easily be converted into cash without losing value are said to be more liquid.
Liquidity in a market is therefore the ability to buy and sell without causing a significant movement in price. In a liquid market, the chances of a trade being executed at a price equal to that of the last transaction is high.
Liquidity in markets is often a direct result of a high volume of trades.
Lets look at the housing market for example.
The housing market is considered to be a very illiquid market (one without a lot of liquidity). This is because of how expensive houses are, meaning that there is not a lot of buyers compared to other markets.
What this will mean is, if you want to sell a house quickly, you will often have to accept a price lower than what it is worth. This is because there’s not enough buyers out there for you to get a high price.
If you wanted to sell your house within the week and there are ten potential buyers. Each buyers only has nine other people competing with them, so they can put in a lower offer with a high likelihood of it being accepted as there is less competition.
More liquid markets such as forex have much more buyers and sellers, so if you wanted a quick sell, you would have much more offers, with a high likelihood of some of them being high enough to match the value of the asset.
Liquidity in the Football index
Markets which are more liquid are associated with lower risk.
Being able to hold assets with the knowledge that there will be enough buyers to give you a good price gives traders confidence and provides favourable trading conditions. This in turn attracts more traders to the market, who can provide further liquidity.
When Football Index first started, they themselves were the liquidity providers. Instead of trying to sell players to a small market of traders all the time, you had the option to sell straight back to FI (instant sell).
The risk was low as a trader, because you knew that there was always a way to sell your players, even if no other trader would buy. It was this way for a few years and it worked well to offset the fact that it was such a small market at the time.
However, as part of the transition to NASDAQ integration, FI removed themselves as liquidity providers, when they introduced order books.
While this was a necessary step to take, it’s quite likely that they rushed to make this decision so that they could de-risk themselves during the Covid pandemic.
The market wasn’t liquid enough to take on this change. Lack of liquidity meant traders weren’t receiving high bids, causing prices to fall, in turn causing traders to panic and eventually the market to crash.Embed from Getty Images
This is a simplified version of what happened, and there were other factors in play, but the lack of liquidity was the invisible villain involved in the market crash.
the future of fi
FI see themselves as being on the way to becoming a serious market, and want to attract big investor to the platform. If they want to do this, they will have to increase the liquidity of the market.
The “Black Sunday” crash was a reminder of how far away the FI is from a finished product in terms of liquidity.
Currently, FI have a deposit bonus and are pumping money into marketing with the hopes of new traders coming in and putting in money, as well as current traders making more deposits. Both of which should boost liquidity.
They also have a liquidity provider in place, LP001.
A liquidity provider is usually an external company/individual who provides liquidity by putting in a high volume of bids and sell offers. They’re commissioned by the market and are often given incentives e.g. no 2% commission
For example, they may put in 100s of buy offers for a player at £5, but also put in 100s of sell offers of the same player at £5.05. This way traders will have a high volume of offers to fall back on if they want to sell and the liquidity providers will make a profit.
While LP001 is a good start, FI have communicated that there will be more liquidity providers coming in the future.
Having more users come in will take many years to provide the necessary liquidity to provide favourable trading conditions. This is why new liquidity providers will be so essential to the market.
The expansion into foreign countries is also a very important. Having pooled liquidity with thousands of new users would go a long way towards becoming a better market.
The future of FI is looking bright. Players have started to rise again after bottoming out. The introduction of NASDAQ and liquidity providers will surely bring about a better platform with more liquidity. This should in turn attract bigger investors to the market, which would be a huge step for FI.
Currently, we’re still far off from the liquidity that we need in the market. This will mean that if you want to sell your players quickly, you’ll need to be willing to sell for less than their current value a lot of the time.
As always, this means you’ll need to be thinking long term with your strategies.
After reading this, hopefully you will have a better understanding of this and the changes that are set to come.