Tick Size Reduction and Price Clustering in a FX Order Book

Mehdi Lallouache and Fr\'ed\'eric Abergel

Papers from arXiv.org

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).

Date: 2013-07, Revised 2014-09
New Economics Papers: this item is included in nep-ifn and nep-mst
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Published in Physica A, Volume 416, 15 December 2014, Pages 488-498

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