Web Trader MT5
A market microstructure phenomenon in which a large position is rapidly passed sequentially from dealer to dealer, each holding the unwanted inventory for a short period and then immediately passing it on to the next player. This redistribution in sequence produces a trading volume that is an order of magnitude larger than the original transaction that started the chain.
When a big institutional order comes into the market, the dealer who gets it takes it into inventory. Then immediately tries to dump it on other dealers, who do the same. Every turn creates more volume. The multiplier means that reported volume around a large order can be multiples of the original notional size.
Hot potato trading is most visible in FX interdealer markets and helps explain why FX trading volumes are so much larger than the underlying economic flows they serve.
Example: A central bank conducts a large FX intervention, selling domestic currency to purchase dollars. The primary dealing bank takes the flow and immediately redistributes inventory through the interdealer market. Further, each successive dealer passes it on. When the position is fully distributed, the reported volume attributable to the single intervention is multiples of the original transaction size. The hot potato multiplier generates volume far in excess of the underlying policy action.
