Tick Size Reduction and Price Clustering in a FX Order Book

Physica A, Volume 416, 15 December 2014, Pages 488-498

16 Pages Posted: 24 Jul 2013 Last revised: 29 Sep 2014

Mehdi Lallouache

Ecole Centrale Paris

Frederic Abergel

Ecole Centrale Paris

Date Written: September 29, 2014

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).

Keywords: Market microstructure, Foreign exchange, Order book, Order flow, Price clustering, Tick size

JEL Classification: G15

Suggested Citation

Lallouache, Mehdi and Abergel, Frederic, Tick Size Reduction and Price Clustering in a FX Order Book (September 29, 2014). Physica A, Volume 416, 15 December 2014, Pages 488-498. Available at SSRN: https://ssrn.com/abstract=2297292 or http://dx.doi.org/10.2139/ssrn.2297292

Mehdi Lallouache (Contact Author)

Ecole Centrale Paris ( email )

Paris
France

Frederic Abergel

Ecole Centrale Paris ( email )

Paris
France
+33141131895 (Phone)

HOME PAGE: http://www.mas.ecp.fr/fiQuant

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