We devise a simple model of liquidity demand and supply to deepen the understanding of dealers’ liquidity provision in currency markets. Drawing on a globally representative data set on currency trading volumes, we show that at times when dealers' intermediation capacity is constrained the...

We analyse how constraints on dealers’ risk-bearing capacity affect market efficiency in the foreign exchange (FX) market. Dealers support market efficiency by accommodating their customers’ trading demands through elastic liquidity provision in normal times but when they face constraints...