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Microstructure and Execution Strategies in the Global Spot FX Market

  • Conference paper
Econophysics Approaches to Large-Scale Business Data and Financial Crisis

Abstract

Modern global inter-bank spot foreign exchange is essentially a limit-order market. Execution strategies in such a market may differ from those in markets that permit market orders. Here we describe microstructure and dynamics of the EBS market (EBS being an ICAP company is the leading institutional spot FX electronic brokerage). In order to illustrate specifics of the limit-order market, we discuss two problems. First, we describe our simulations of maker loss in case when the EUR/USD maker order is pegged to the market best price. We show that the expected maker loss is lower than the typical bid/offer spread. Second, we discuss the problem of optimal slicing of large orders for minimizing execution costs. We start with analysis of the expected execution times for the EUR/USD orders submitted at varying market depth. Then we introduce a loss function that accounts for the market volatility risk and the order’s P/L in respect to the market best price. This loss function can be optimized for given risk aversion. Finally, we apply this approach to slicing large limit orders.

The information presented in this work is provided for educational purposes only and does not constitute investment advice. Any opinions expressed in this work are those of the author and do not necessarily represent the views of ICAP Electronic Broking LLC, its management, officers or employees.

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Notes

  1. 1.

    With proliferation of alternative trading systems, dark liquidity pools, etc., another important problem for institutional trading has become answering the question “Where to trade” [14].

  2. 2.

    Recall, however, that the credit constraints may violate this rule (see Sect. 2).

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Authors and Affiliations

  1. Business Development and Research, ICAP Electronic Broking LLC, One Upper Pond Road, Building F, Parsippany, NJ 07054, USA

    Anatoly B. Schmidt

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  1. Anatoly B. Schmidt
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Correspondence to Anatoly B. Schmidt .

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Editors and Affiliations

  1. Department of Computational, Intelligence and Systems Science, Interdisciplinary Graduate School of Science and Engineering, Tokyo Institute of Technology, 4259 Nagatsuta, Midori-ku, Yokohama, 226-8502, Japan

    Misako Takayasu (Associate Professor) (Associate Professor)

  2. Research Center for Price Dynamics and Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo, 186-8603, Japan

    Tsutomu Watanabe (Professor) (Professor)

  3. Fundamental Research Group, Sony Computer Science Laboratories, 3-14-13 Higashigotanda, Shinagawa-ku, Tokyo, 141-0022, Japan

    Hideki Takayasu (Senior Researcher) (Senior Researcher)

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Schmidt, A.B. (2010). Microstructure and Execution Strategies in the Global Spot FX Market. In: Takayasu, M., Watanabe, T., Takayasu, H. (eds) Econophysics Approaches to Large-Scale Business Data and Financial Crisis. Springer, Tokyo. https://doi.org/10.1007/978-4-431-53853-0_3

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