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

Alexis Stenfors, Masayuki Susai

Research output: Contribution to journalArticlepeer-review

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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.
Original languageEnglish
Pages (from-to)36-57
JournalJournal of International Financial Markets, Institutions and Money
Volume59
Early online date27 Nov 2018
DOIs
Publication statusPublished - 1 Mar 2019

Keywords

  • market microstructure
  • limit order book
  • foreign exchange
  • high-frequency trading
  • algorithmic trading
  • liquidity

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