Tick size reduction and price clustering in a FX order book

Mehdi Lallouache and Frédéric Abergel ()
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Mehdi Lallouache: FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris
Frédéric Abergel: FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris

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Abstract: Using a new high frequency quality data set we provide a precise empirical study of the interdealer spot market. We check that the main stylized facts of financial time series are valid for the FX market: fat-tailed distribution of returns, aggregational normality and volatility clustering. We report two standard microstructure phenomena: microstructure noise effects in the signature plot and the Epps effect. We find an unusual shape for the average book, the spread distribution being bimodal. We construct the order flow and analyse its main characteristics: volume, placement, arrival intensity and sign. Many quantities have been dramatically affected by the decrease of the tick size in March 2011. We argue that the coexistence of manual traders and algorithmic traders, who react differently to the new tick size, leads to a strong price clustering in all types of orders and affects the price formation.

Date: 2014
Note: View the original document on HAL open archive server: https://hal.science/hal-01006414
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Published in Physica A: Statistical Mechanics and its Applications, 2014, 416, pp.488-498. ⟨10.1016/j.physa.2014.09.016⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01006414

DOI: 10.1016/j.physa.2014.09.016

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