FX Market Metrics: New Findings Based on Cls Bank Settlement Data

66 Pages Posted: 22 Mar 2017 Last revised: 28 Mar 2017

See all articles by Joel Hasbrouck

Joel Hasbrouck

New York University (NYU) - Department of Finance

Richard M. Levich

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: March 2017

Abstract

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. 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 that do not belong to the “UK Commonwealth” pairs, for which EBS coverage is limited.We estimate Amihud (2002) illiquidity ratios from CLS submissions and Olsen price records, and examine the correlations between these ratios and price impact estimates based on high frequency EBS data and reported by MRW. The correlation is 0.748, but with marginal statistical significance and only when the commonwealth pairs are excluded from the analysis. When the commonwealth pairs are included, the correlation drops to -0.130 (insignificant). We believe that, as with the volume estimates, this reflects EBS’ limited coverage of the commonwealth currency pairs. The common liquidity factor in our illiquidity ratios constructed from all major pairs is highly correlated, however, with the factor based only on non-commonwealth pairs, suggesting that liquidity factors constructed from EBS data may be good proxies for factors based on broader samples.Our data include numerical identifiers for counterparties to each trade which allows us to estimate market concentration by currency pair. We find that trading is more concentrated (across participants) in less actively traded currencies, which typically exhibit lower liquidity.

Suggested Citation

Hasbrouck, Joel and Levich, Richard M., FX Market Metrics: New Findings Based on Cls Bank Settlement Data (March 2017). NBER Working Paper No. w23206. Available at SSRN: https://ssrn.com/abstract=2938706

Joel Hasbrouck (Contact Author)

New York University (NYU) - Department of Finance ( email )

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Richard M. Levich

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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