Liquidity provision in the overnight foreign exchange market

Abstract

Abstract:We presents evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost ten years. Two main findings support this: (i) The net position of nonfinancial customers is negatively correlated with the exchange rate, opposed to the positive correlation found for financial customers; (ii) Changes in net position of non-financial customers are forecasted by changes in net position of financial customers, indicating that non-financial customers take a passive role consistent with liquidity provision.

An investigation of customer order flow in the foreign exchange market

“…Our result may reflect the nature of private investors who could have a tendency to be technical traders attempting to buy or sell at price inflection points 19 or the private client sector may be passive liquidity providers in a similar way to corporates. Bjønnes et al (2005a) discuss this aspect of FX markets in more detail particularly in reference to the corporate segment. The asset manager sector comes third in significance, with the corporate client sector the least significant.…”

Exchange rates and order flow in the long run

“…In addition, the tests they use for cointegration are known to suffer from size distortion in small samples, which tends to produce spurious evidence of cointegation. 2 This distortion is know to increase with the number of variables in the system, the number of lags, and may also be affected by the covariance matrix of the residuals. For reliable inference, the conventional asymptotic critical values used with cointegration tests need to be adjusted.…”

Foreign Exchange Market: Institutional Structure, Regulation, and Policy Implications

“…the dealer usually passes any inventory imbalance quickly to others via aggressive order strategies [27]. The estimated half-life of an inventory position ranges from one minute for mostly active dealers at large banks to below half an hour for less active dealers at small banks [13,28]. In this respect, it differs markedly from other OTC markets.…”

“…Before the late 1990s, the average bid-ask spread paid by non-financial corporates in customer market was roughly 20 times that in interdealer market [28,35]. Till now, the difference in spreads between the two FX segments has almost disappeared or even reversed [13].…”