FX Liquidity and Market Metrics: New Results Using CLS Bank Settlement Data
57 Pages Posted: 8 Feb 2017 Last revised: 23 Oct 2019
Date Written: September 30, 2019
Using a new and unique data set of foreign currency settlement instructions provided by CLS Bank, we investigate activity and liquidity in the foreign exchange market. The settlement data are observed at high frequency and span a wide range of participants and trading mechanisms. In the major currency pairs, CLS settlement volume shares are similar to those reported in the BIS triennial surveys. They are also similar to shares computed from EBS trade data reported by Mancini, Ranaldo and Wrampelmeyer (2013) (MRW), but only for currency pairs for which EBS is considered the dominant electronic platform.
We estimate Amihud (2002) illiquidity ratios from CLS submissions and Olsen price records, and compare these ratios to price impact estimates based on high frequency EBS data and reported by MRW. Correlation between illiquidity and EBS-based price impact is strong for EBS-dominant currency pairs, but not for Reuters-dominant pairs. The common factor in the illiquidity ratios across all major pairs is highly correlated, however, with a factor constructed solely from EBS-dominant pairs, suggesting that EBS liquidity factors may be good proxies for factors based on broader samples.
Keywords: Foreign exchange, CLS Bank, market microstructure, liquidity
JEL Classification: F31, G12, G15, G23
Suggested Citation: Suggested Citation