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ICAP Electronic Broking

ICAP Electronic Broking. VAR Analysis of Market Impact in the Institutional Spot FX Market Anatoly B. Schmidt & Olivia Yao EBS Strategic Initiatives ICAP Electronic Broking, LLC Computing in Economics and Finance 2012, Prague, 27 – 29 June 2012. 1. Introduction.

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ICAP Electronic Broking

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  1. ICAP Electronic Broking VAR Analysis of Market Impact in the Institutional Spot FX Market Anatoly B. Schmidt & Olivia Yao EBS Strategic Initiatives ICAP Electronic Broking, LLC Computing in Economics and Finance 2012, Prague, 27 – 29 June 2012

  2. 1.Introduction Impact of trading on price (market impact (MI))=> Algorithmic trading: Amgren & Chriss (2000). Permanent MI: Amihud & Mendelson (1980) Decaying MI: Bouchaud et al (2006) in equities, Schmidt (2010) in FX.

  3. 2. Market impact

  4. 3.Structural VAR model (I) Hasbrouck (1991): returns & signed trading volumes (VAR2) Note: trading volumes are not order flows... Instantaneous effect of trading on returns (k=0)

  5. 3.Structural VAR model (II) LOB effects in equity markets: Engle & Patton (2004); Mizrach (2009); Hautsch & Huang (2009). LOB variables: V1 – signed order volume at best price (lagged) Vb – signed bulk order volume (lagged) V1 + Vb = V10 (lagged) Vin – signed inside-market order flow (instantaneous) Whole pip pricing: V10 is volume within 10 pips from best price Decimal pip pricing: V10 is volume within 10 populated levels. 1.2345(6) pips decimal pip big figure

  6. 3.Structural VAR model (III) VAR3(r, x, V1) VAR3(r, x, Vb) VAR3(r, x, Vin) VAR4(r, x, V10, Vin) 20-lag models: 3SLS/SUR method (RATS software) MI => Cumulative impulse response (CIR) for x0 = 1 MM (Hasbrouck, 1991): CIR(m, x0) =

  7. 4. Data EBS data: EUR/USD (one pip spread) EUR/JPY (two - three pip spread) 4 weeks, 7:00 – 17:00 GMT Whole pip pricing: 7-Feb-2011 – 4-Mar-2011 Decimal pip pricing: 6-Jun-2011 – 1-Jul-2011 One-second timescale: 720020 points Ten-second timescale: 72020 points

  8. 5. Results (1): whole-pip EURUSD, 1-sec grid

  9. 5. Results (2): decimal-pip EURUSD, 1-sec grid

  10. 5. Results (3): decimal-pip EURJPY, 1-sec grid

  11. 5. Results (4): decimal-pip EURUSD, 10-sec grid

  12. 5. Results (6): decimal-pip EURJPY, 10-sec grid

  13. 6. Conclusions 1. LOBtop “push” - small but persistent effect 2. LOB bulk “pull” – only in currency pairs with thick order book (?) 3. Inside-market order flow – significant for currency pairs with a wide bid/offer spread (?) 4. Decay of market impact on 10-second timescale

  14. Q & A

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