IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v20y2010i4p323-345.html
   My bibliography  Save this article

The electronic trading systems and bid-ask spreads in the foreign exchange market

Author

Listed:
  • Ding, Liang
  • Hiltrop, Jonas

Abstract

This paper examines the impact of electronic trading systems on the bid-ask spreads in the foreign exchange market. The paper finds: first, the EBS reduces spreads significantly; second, the EBS is more influential than the Reuters system for the currency pair DEM/USD; third, dealers with information advantage tend to quote relatively wider spreads with the new systems; fourth, geographical differences in market liquidity are reduced through the new systems, and finally, the effects occur immediately and persist in the long-term. Thus, both proposed positive and negative impacts of the electronic systems are found to be true in this paper, but our findings also suggest that positive effects dominate and the electronic systems overall increase FX market liquidity.

Suggested Citation

  • Ding, Liang & Hiltrop, Jonas, 2010. "The electronic trading systems and bid-ask spreads in the foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 323-345, October.
    • Handle: RePEc:eee:intfin:v:20:y:2010:i:4:p:323-345
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042-4431(10)00024-7
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Charles Goodhart & Ryan Love & Richard Payne & Dagfinn Rime, 2002. "Analysis of spreads in the dollar/euro and deutschemark/dollar foreign exchange markets," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 535-552.
    3. Biais, Bruno, 1993. "Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-185, March.
    4. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    5. Hartmann, Philipp, 1999. "Trading volumes and transaction costs in the foreign exchange market: Evidence from daily dollar-yen spot data," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 801-824, May.
    6. Hans R. Stoll, 2006. "Electronic Trading in Stock Markets," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 153-174, Winter.
    7. Glosten, Lawrence R, 1994. "Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-1161, September.
    8. Chung, Kee H. & Chuwonganant, Chairat, 2009. "Transparency and market quality: Evidence from SuperMontage," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 93-111, January.
    9. Phylaktis, Kate & Chen, Long, 2009. "Price discovery in foreign exchange markets: A comparison of indicative and actual transaction prices," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 640-654, September.
    10. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
    11. Almeida, Alvaro & Goodhart, Charles & Payne, Richard, 1998. "The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(3), pages 383-408, September.
    12. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2007. "Real-time price discovery in global stock, bond and foreign exchange markets," Journal of International Economics, Elsevier, vol. 73(2), pages 251-277, November.
    13. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    14. Jeffrey A. Frankel & Giampaolo Galli & Alberto Giovannini, 1996. "The Microstructure of Foreign Exchange Markets," NBER Books, National Bureau of Economic Research, Inc, number fran96-1, March.
    15. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May.
    16. Christie, William G & Schultz, Paul H, 1994. "Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-1840, December.
    17. Naik, Narayan Y & Neuberger, Anthony & Viswanathan, S, 1999. "Trade Disclosure Regulations in Markets with Negotiated Trades," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 873-900.
    18. Bessembinder, Hendrik & Maxwell, William & Venkataraman, Kumar, 2006. "Market transparency, liquidity externalities, and institutional trading costs in corporate bonds," Journal of Financial Economics, Elsevier, vol. 82(2), pages 251-288, November.
    19. Menkhoff, Lukas & Schmeling, Maik, 2008. "Local information in foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1383-1406, December.
    20. Bollerslev, Tim & Melvin, Michael, 1994. "Bid--ask spreads and volatility in the foreign exchange market : An empirical analysis," Journal of International Economics, Elsevier, vol. 36(3-4), pages 355-372, May.
    21. Kaul, Aditya & Sapp, Stephen, 2009. "Trading activity, dealer concentration and foreign exchange market quality," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2122-2131, November.
    22. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    23. Bloomfield, Robert & O'Hara, Maureen, 2000. "Can transparent markets survive?," Journal of Financial Economics, Elsevier, vol. 55(3), pages 425-459, March.
    24. Flood, Mark D, et al, 1999. "Quote Disclosure and Price Discovery in Multiple-Dealer Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 37-59.
    25. Hartmann, Philipp, 1998. "Do Reuters spreads reflect currencies' differences in global trading activity?," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 757-784, October.
    26. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 5-35.
    27. Pagano, Marco & Roell, Ailsa, 1996. "Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    28. Bollerslev, Tim & Domowitz, Ian, 1993. "Trading Patterns and Prices in the Interbank Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 48(4), pages 1421-1443, September.
    29. Gençay, Ramazan & Dacorogna, Michel & Muller, Ulrich A. & Pictet, Olivier & Olsen, Richard, 2001. "An Introduction to High-Frequency Finance," Elsevier Monographs, Elsevier, edition 1, number 9780122796715.
    30. William Barker, 2007. "The Global Foreign Exchange Market: Growth and Transformation," Bank of Canada Review, Bank of Canada, vol. 2007(Autumn), pages 4-13.
    31. Chris D'Souza, 2008. "Price Discovery Across Geographic Locations in the Foreign Exchange Market," Bank of Canada Review, Bank of Canada, vol. 2008(Spring), pages 19-27.
    32. Huang, Roger D & Masulis, Ronald W, 1999. "FX Spreads and Dealer Competition across the 24-Hour Trading Day," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 61-93.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sirimon Treepongkaruna & Robert Brooks & Stephen Gray, 2012. "Do trading hours affect volatility links in the foreign exchange market?," Australian Journal of Management, Australian School of Business, vol. 37(1), pages 7-27, April.
    2. Liang Ding & Hao Zou & Vittorio Addona, 2012. "Semi‐transparency, dealership market, and foreign exchange market quality," Review of Financial Economics, John Wiley & Sons, vol. 21(1), pages 1-13, January.
    3. Henao-Londono, Juan C. & Guhr, Thomas, 2022. "Foreign exchange markets: Price response and spread impact," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 589(C).
    4. Juan Camilo Henao Londono & Thomas Guhr, 2021. "Foreign exchange markets: price response and spread impact," Papers 2104.09309, arXiv.org, revised Jul 2021.
    5. Goktug Sahin & Afsin Sahin, 2023. "An Empirical Examination of Asymmetry on Exchange Rate Spread Using the Quantile Autoregressive Distributed Lag (QARDL) Model," JRFM, MDPI, vol. 16(1), pages 1-25, January.
    6. Luo, Ji & Tee, Kai-Hong & Li, Baibing, 2017. "Timing liquidity in the foreign exchange market: Did hedge funds do it?," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 47-62.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    2. Liang Ding & Hao Zou & Vittorio Addona, 2012. "Semi‐transparency, dealership market, and foreign exchange market quality," Review of Financial Economics, John Wiley & Sons, vol. 21(1), pages 1-13, January.
    3. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    4. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
    5. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    6. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    7. Liang Ding, 2009. "Bid-ask spread and order size in the foreign exchange market: an empirical investigation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 98-105.
    8. Pham, Thu Phuong & Westerholm, P. Joakim, 2013. "A survey of research into broker identity and limit order book," Working Papers 17212, University of Tasmania, Tasmanian School of Business and Economics, revised 16 Oct 2013.
    9. Stenfors, Alexis & Susai, Masayuki, 2019. "Liquidity withdrawal in the FX spot market: A cross-country study using high-frequency data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 36-57.
    10. Chung, Kee H. & Chuwonganant, Chairat, 2009. "Transparency and market quality: Evidence from SuperMontage," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 93-111, January.
    11. Tarun Ramadorai, 2008. "What determines transaction costs in foreign exchange markets?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 14-25.
    12. Paulo Pereira da Silva & Carlos Vieira & Isabel Vieira, 2018. "Central clearing and CDS market quality," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(6), pages 731-753, June.
    13. Lo, Ingrid & Sapp, Stephen G., 2010. "Order aggressiveness and quantity: How are they determined in a limit order market?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 213-237, July.
    14. John Board & Charles Sutcliffe & Stephen Wells, 2002. "Transparency and Fragmentation," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-4039-0707-3.
    15. Menkhoff, Lukas & Schmeling, Maik, 2010. "Trader see, trader do: How do (small) FX traders react to large counterparties' trades?," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1283-1302, November.
    16. Kate Phylaktis & Long Chen, 2010. "Asymmetric information, price discovery and macroeconomic announcements in FX market: do top trading banks know more?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 228-246.
    17. Bjonnes, Geir Hoidal & Rime, Dagfinn, 2005. "Dealer behavior and trading systems in foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 75(3), pages 571-605, March.
    18. G. Wuyts, 2007. "Stock Market Liquidity.Determinants and Implications," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(2), pages 279-316.
    19. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    20. Angelo Ranaldo & Paolo Santucci de Magistris, 2018. "Trading Volume, Illiquidity and Commonalities in FX Markets," Working Papers on Finance 1823, University of St. Gallen, School of Finance, revised Oct 2019.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:20:y:2010:i:4:p:323-345. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.