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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