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Tick Size Reduction and Price Clustering in a FX Order Book

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  • Mehdi Lallouache
  • Fr'ed'eric Abergel

Abstract

We investigate the statistical properties of the EBS order book for the EUR/USD and USD/JPY currency pairs and the impact of a ten-fold tick size reduction on its dynamics. A large fraction of limit orders are still placed right at or halfway between the old allowed prices. This generates price barriers where the best quotes lie for much of the time, which causes the emergence of distinct peaks in the average shape of the book at round distances. Furthermore, we argue that this clustering is mainly due to manual traders who remained set to the old price resolution. Automatic traders easily take price priority by submitting limit orders one tick ahead of clusters, as shown by the prominence of buy (sell) limit orders posted with rightmost digit one (nine).

Suggested Citation

  • Mehdi Lallouache & Fr'ed'eric Abergel, 2013. "Tick Size Reduction and Price Clustering in a FX Order Book," Papers 1307.5440, arXiv.org, revised Sep 2014.
    • Handle: RePEc:arx:papers:1307.5440
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    References listed on IDEAS

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    Cited by:

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    2. Mahmoodzadeh, Soheil & Gençay, Ramazan, 2017. "Human vs. high-frequency traders, penny jumping, and tick size," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 69-82.
    3. Vladim'ir Hol'y & Petra Tomanov'a, 2021. "Modeling Price Clustering in High-Frequency Prices," Papers 2102.12112, arXiv.org, revised Mar 2021.
    4. Xiao, Xijuan & Yamamoto, Ryuichi, 2020. "Price discovery, order submission, and tick size during preopen period," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    5. Li, Xin & Li, Shenghong & Xu, Chong, 2020. "Price clustering in Bitcoin market—An extension," Finance Research Letters, Elsevier, vol. 32(C).
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    7. Damien Challet & R'emy Chicheportiche & Mehdi Lallouache & Serge Kassibrakis, 2016. "Statistically validated lead-lag networks and inventory prediction in the foreign exchange market," Papers 1609.04640, arXiv.org, revised Jul 2018.

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