The Impact of Strategic Limit Order Submissions on Foreign Exchange Market Liquidity

33 Pages Posted: 26 Jan 2018

See all articles by Alexis Stenfors

Alexis Stenfors

Portsmouth Business School

Masayuki Susai

Nagasaki University

Date Written: January 25, 2018


In this paper, we empirically investigate the short-term impact of human/algorithmic limit order submissions on the liquidity provision and withdrawal process of other human/algorithmic traders. Using a high-frequency dataset containing over 1.5 million limit orders in the USD/JPY and EUR/JPY foreign exchange spot markets (amounting to a limit order volume of approximately $2 trillion), we document three key findings. First, order-splitting strategies widely adopted by algorithmic traders to disguise the true order size seem to go detected and are perceived as more information-rich or predatory than orders of the corresponding size typically submitted by human traders. Second, the inverse relationship between limit order size and price aggressiveness is less consistent than expected – both concerning traders’ strategic order submissions and their impact on the liquidity withdrawal by others. Third, we find that traders appear to be more sensitive to limit orders submitted from the same side (non-execution risk) than to the opposite side of the order book (free option risk), but that the ‘recovery’ of the limit order book primarily is driven by a reassessment of free option risk.

Keywords: market microstructure, limit order book, foreign exchange, high-frequency trading, volume-based liquidity

JEL Classification: D4, F3

Suggested Citation

Stenfors, Alexis and Susai, Masayuki, The Impact of Strategic Limit Order Submissions on Foreign Exchange Market Liquidity (January 25, 2018). Available at SSRN: or

Alexis Stenfors (Contact Author)

Portsmouth Business School ( email )

Portsmouth, PO1 3DE
United Kingdom

Masayuki Susai

Nagasaki University

Nagasaki, Nagasaki 850-8506

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