The Evolution of Price Discovery in an Electronic Market

41 Pages Posted: 25 Jun 2020

See all articles by Alain Chaboud

Alain Chaboud

Federal Reserve Board - Division of International Finance

Erik Hjalmarsson

University of Gothenburg - Centre for Finance

Filip Zikes

Board of Governors of the Federal Reserve System

Date Written: June, 2020

Abstract

We study the evolution of the price discovery process in the euro-dollar and dollar-yen currency pairs over a ten-year period on the EBS platform, a global trading venue used by both manual and automated traders. We find that the importance of market orders decreases sharply over that period, owing mainly to a decline in the information share from manual trading, while the information share of market orders from algorithmic and high-frequency traders remains fairly constant. At the same time, there is a substantial, but gradual, increase in the information share of limit orders. Price discovery also becomes faster, suggesting improvements in market efficiency. The results are consistent with theoretical predictions that in more efficient markets, informed traders tend to use more limit orders.

Keywords: High-frequency trading, Limit orders, Price discovery

JEL Classification: G14, G15, F31

Suggested Citation

Chaboud, Alain and Hjalmarsson, Erik and Zikes, Filip, The Evolution of Price Discovery in an Electronic Market (June, 2020). FEDS Working Paper No. 2020-051, Available at SSRN: https://ssrn.com/abstract=3635495 or http://dx.doi.org/10.17016/FEDS.2020.051

Alain Chaboud (Contact Author)

Federal Reserve Board - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
(202) 452 3756 (Phone)

Erik Hjalmarsson

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Filip Zikes

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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