The Electronic Trading Systems and Bid-Ask Spreads in the Foreign Exchange Market

44 Pages Posted: 23 Mar 2009 Last revised: 14 Apr 2010

See all articles by Liang Ding

Liang Ding

Macalester College - Department of Economics

Jonas Hiltrop

Cornerstone Research

Date Written: February 17, 2009

Abstract

This paper examines the impact of electronic trading systems on the bid-ask spreads in the foreign exchange market. The paper finds: First, both the Reuters system and EBS reduce spreads significantly; Second, the EBS is more influential than the Reuters system for the currency pair DEM/USD; Third, big dealers tend to quote relatively wider spreads to compensate for their loss of information advantage in the more transparent new systems; Fourth, dealers are more sensitive to volatility in the new systems; Fifth, geographical difference in market liquidity is reduced through the new systems, and finally, the effects occur immediately and persist in the long term. Thus, both proposed positive and negative impacts of the electronic systems are found to be true in this paper, but our findings also suggest that positive effects dominate and the electronic systems overall increase FX market liquidity.

Keywords: bid-ask spread, electronic brokers system, foreign exchange market

JEL Classification: F31, G14

Suggested Citation

Ding, Liang and Hiltrop, Jonas, The Electronic Trading Systems and Bid-Ask Spreads in the Foreign Exchange Market (February 17, 2009). Available at SSRN: https://ssrn.com/abstract=1366947 or http://dx.doi.org/10.2139/ssrn.1366947

Liang Ding (Contact Author)

Macalester College - Department of Economics ( email )

1600 Grand Ave.
Saint Paul, MN 55105
United States
651-696-6822 (Phone)

Jonas Hiltrop

Cornerstone Research ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States

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