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Liquidity withdrawal in the FX spot market: A cross-country study using high-frequency data

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  • Stenfors, Alexis
  • Susai, Masayuki

Abstract

This paper studies short-term liquidity withdrawal in the FX spot market for eight currency pairs. We include over 3 million limit order submissions, worth more than $5 trillion, and investigate the drivers of two different measures of volume-based liquidity. Overall, we find that market participants react differently to changes in the state of the market for different currency pairs. Moreover, the liquidity withdrawal process also differs depending on the perceived information content of new limit orders submitted. Finally, we document that a ‘liquidity illusion’ might exist in FX spot markets electronic trading platforms where algorithmic and high-frequency trading is prominent.

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  • 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.
    • Handle: RePEc:eee:intfin:v:59:y:2019:i:c:p:36-57
    DOI: 10.1016/j.intfin.2018.11.010
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    5. Alexis Stenfors & Kaveesha Dilshani & Andy Guo & Peter Mere, 2023. "A Model to Quantify the Risk of Cross-Product Manipulation: Evidence from the European Government Bond Futures Market," Working Papers in Economics & Finance 2023-06, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
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    More about this item

    Keywords

    Algorithmic trading; Foreign exchange; High-frequency trading; Limit order book; Liquidity; Market microstructure;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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