Electronic trading in the foreign exchange spot market

Thesis

During the past 30 years, the proliferation of electronic trading has catalysed profound structural change in the global foreign exchange (FX) spot market. Today, more than 60% of the market's volume occurs via electronic trading platforms, which provide traders with round-the-clock market access from anywhere in the world. Such platforms offer several practical benefits that have encouraged market participation from a broad new class of financial institutions and have thereby spurred market growth.

The most widely used electronic trading platforms in the FX spot market incorporate several features that differentiate them from those used in other financial markets. These features raise many important questions about order flow, market state, price formation, trader behaviour, and volatility. Despite the enormous trade volumes that such platforms facilitate, these questions have received almost no attention to date.

In this thesis, we study a recent, high-quality data set from a large electronic trading platform in the FX spot market in order to investigate several aspects of trading via this mechanism. We calculate a wide range of statistics regarding order flow and market state, and we highlight how our findings contrast to those reported by empirical studies of electronic trading platforms in other markets. We study the autocorrelation properties of returns, absolute returns, and order flow, and we investigate the extent to which the market's organization impacts price formation. We also introduce a model designed to reproduce the most important properties of trading via such a platform. We derive several results regarding the model's temporal evolution, and we simulate the model to investigate how the interactions between individual traders influence volatility. We conclude that electronic trading platforms in the FX spot market retain many desirable features of centralized markets while providing traders with explicit control over their personal trading partnerships.

Authors: Gould, MD

• Publication date: 2013
• DOI: 10.5287/ora-ey5v2vppr
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: foreign exchange market; quasi-centralized liquidity; market microstructure; limit order book; Electronic trading; price formation
• Subjects: Mathematics; Mathematical finance