Comparison: three flavours of thin market

[Fairman]

Comparison: three flavours of thin market

Not all thin markets are the same. The way to be careful depends on the kind.

Time-thin: the pair is liquid in general but the hour is quiet, such as Friday evening or the Sunday open. Spreads widen, the book is shallow, and the usual patterns break. It is temporary and recovers on schedule.

Structurally thin: the pair is thin by nature, like USDTRY or USDNOK. The spread is wide all day, the moves come in jumps, and the market depends on a small number of large players.

Event-thin: liquidity disappears around a specific event. Quotes get pulled before a rate decision, and the market is empty for a few seconds after. Spreads spike, and slippage runs high.

Each type needs a different response. Time-thin markets can be avoided by watching the clock. Structurally thin markets need smaller size and wider stops. Event-thin markets need either avoidance or deliberate preparation.

Mixing them up leads to mistakes, like treating a structurally thin pair as if the usual risk limits apply.

Which type of thin market has caused the most damage in recent trading, and was it recognised at the time?