Impact of Trading in the Multi-Dealer Spot Foreign Exchange

Abstract

Impact of trading in the multi-dealer spot foreign exchange market is described using a structural vector autoregressive model. The model is derived in terms of return, signed trading volume, signed order book volume, and signed insidemarket order flow. EUR/USD and EUR/JPY data samples with whole-pip pricing and decimal pip-pricing are used. The results show that market impact is determined primarily by the signed trading volume and decays on the 10-second time scale. Signed inside-market order flow may be important for currency pairs with wide bid/offer spreads. Two subtle effects, the limit order book’s push and pull, are described.