Seegers seconded this recommendation, saying, “With these currency pairs, the majority of the trading that is done, is done during the time zone of the country of origin. When trading [exotic currencies], I would recommend trading them when those markets actually are open and trading as opposed to local time zones when markets may be very thin.” He goes on to say that traders may not even be able to access some of these markets during their local time zone because the liquidity is so shallow then.
Another side effect of less liquidity and volume means that bid/ask spreads will be wider. Whereas deep order books keep these spreads narrow in major currency pairs, that lack of volume in exotics means you need to account for a wider initial spread to make up on any trade. Seegers reminds that leverage multiplies this cost of trading.
Despite these wider spreads, the benefit that attracts a number of traders to exotics is the volatility that can be seen in smaller markets (see “Vast volatility”). Seegers says this volatility comes from a number of different sources. “The spreads are much wider to do business within, there’s a lot less depth in the book of trading — meaning there are fewer banks or counterparties making markets. What that does is make it a less competitive market,” he says. “These wider spreads and lack of depth mean that when the market does move, it can move violently. With the volatility, there are risk and reward ramifications.”
Before you even begin looking at exotic currencies, Seegers recommends talking with your broker about these issues. “It’s important to discuss with your broker that these pairs will be streamed 24/6; that you’ll be able to enter and exit trades with consistent prices during non-market hours for the residing country,” he says. “Be vocal with your broker; open dialogue is crucial.”
World events continue to shape markets with different currencies gaining or losing popularity. Just a few years ago, the Canadian and Australian dollars were considered exotics, but now are major currencies. “An exotic currency of today could be the future currency of tomorrow,” Seegers says.