There is an online dashboard (one screen), Slack (the second screen), and Treasury Numbers are still changing from last night, with most of the employees having not yet started work. These changes were small. The larger trades occurred last night. Spreads widened slightly. A planned exchange will cost more today than it would have 12 hours ago.

Via Unsplash

This is generally how “treasury stress” typically presents itself. Instead of a huge news headline, there is a very small gap in the perceived liquidity versus actual liquidity when trying to use it.

The Thin Books Turn Normal Transfers Into Risk

You generally notice the effects of market depth on normal days. Payroll transfers. Vendor settlements. Rebalancing among wallet accounts and/or bank rails. None of these events should ever be “high-stress.” However, if there isn’t much liquidity in the order book, even a routine treasury activity will rapidly increase the price against you, such that you’ll feel it.

That is important because treasury operations rely upon repetition. If a firm experiences slippage in a single trade, then it is annoying. But if they experience it repeatedly each week, then it begins to look like a policy failure dressed up as market noise. Deep books provide you with the ability to perform large orders without converting a routine transaction into a price event.

Execution Quality Manifests Itself After The Trade

Many treasury decisions are evaluated post-trade. You approve a conversion; the ticket is executed, and later you see the total cost in the execution report. The difference between the quoted price and the actual price is typically where the true education lies.

This is where crypto market makers quietly matter. They assist in maintaining bid/ask liquidity so that your group doesn’t step into a void (i.e., no liquidity) whenever they want to execute a trade. You’re not purchasing an idea about efficient markets; you are reducing the probability that an operational payment occurs at a greater-than-necessary cost due to poor timing.

Volatility Hurts More When Timing Is Rigid

Treasury departments do not have control over when to trade on the best possible terms. When there are needs at your company (e.g., funding of an account prior to a book closing; paying vendors the same day you received their invoice; moving collateral because another division of your company is actively trading), the markets are not going to wait until all your in-house timelines coincide.

In these cases, the function of the liquidity (depth) becomes a buffer. Liquidity does not remove risk/uncertainty/volatility from the marketplace; nor does it provide a “perfect” fill. But it provides you with better odds of getting something close to what you expect during those times when the rest of your organization continues to run. For many organizations, this equates to protected profit margins and internal confidence/trust.

Establishing Good Treasury Practice Starts Before Stress Develops

You can’t build resiliency in your treasury operations when your screen is flashing red. The building of resilience occurs at an earlier point in time; you are able to select the correct trading venue(s), monitor (the) depth level(s) on both sides of each of the relevant currency pair(s) which your organization actively uses and treat liquidity as a component of your operating structure instead of just an additional service offering. When an organization has developed this type of disciplined behavior with respect to its use of liquidity, the conversation will shift from reacting to every single less-than-optimal fill as unexpected events, to using market depth as a means of obtaining actual forms of insurance for those few days that would be expected to be non-eventful.