How crosses get priced, and why the lag is real

[Shadow Trader]

A cross like EURJPY doesn't need its own market. Its price can be derived from EURUSD and USDJPY: multiply the two. In practice, liquidity providers do exactly that, adjusting for their own inventory and risk.

When one leg jumps, the cross has to follow. The cross price and the synthetic price usually stay close, but for a few milliseconds, or occasionally seconds on thin pairs, they diverge. A scalper watching both can sometimes see EURUSD move first and EURJPY follow.

This is a form of triangular arbitrage, and professional firms have done it with fast infrastructure for decades. A retail trader with a standard connection doesn't compete in that game. The gap closes before an order can reach the server.

What the lag does offer is context. When EURUSD has just spiked, a cross trade entered a second later may be buying a price that isn't yet fully adjusted, or catching up to one that already moved.

The point isn't to chase the lag. It's to understand that crosses reflect majors, which explains why strange moves in a cross sometimes trace back to a different pair.

Brokers pricing a cross can do it two ways. Some compute a synthetic price from the two legs and add a markup. Others take direct quotes from providers who make that cross. The first approach leads to lag and wider spreads when either leg is thin. The second produces better prices on liquid crosses and worse ones on obscure ones.

You can see which method a broker uses by watching a cross and its legs together on one-second data during a news spike. A synthetic price changes in lockstep with the legs, with a tiny delay. A directly quoted price may move independently for a moment.

Knowing this helps interpret odd behavior. When EURJPY jumps while EURUSD and USDJPY have not changed, the cross is quoting from its own source. When it lags by two seconds, it is probably synthetic.

Is it worth watching the major legs when trading a cross, or is that a distraction?

[FXS HongKong Scalper]

The cross price and the synthetic price usually stay close, but for a few milliseconds, or occasionally seconds on thin pairs, they diverge.

The lag is clearest around Tokyo data. A jump in USDJPY is reflected in EURJPY slightly later and sometimes with a wider spread for a moment. Anyone trading the cross on news should be aware they are effectively trading two legs, and the slower of the two sets the quality of the fill.