Masayuki Susai

We Missed It Again! Why Do So Many Market Orders in High-Frequency FX Trading Fail to be Executed?

The cancellation/revision rates in the Electronic Broking System (EBS) foreign exchange (FX) markets have dramatically increased as FX traders have relied more on algorithm trading in recent years. As an unintended consequence, market orders that were intended to be executed instantly with the best existing quotes in the market have experienced an increased likelihood of not being executed. Across various currency pairs in 2010, the failure rate of market orders was approximately 60%. This high rate of market-order execution failures cannot be observed in 2003–2004. By fully examining the EBS order-by-order database, we provide vivid illustrations of behaviors observed in limit orders and market orders at high frequency. We find evidence that market orders in the EBS FX markets fail to be executed because (1) turnover of orders is too fast for a market order to hit a moving target and (2) market orders are not only being used in the traditional sense in which a trader is promised an immediate transaction but also being used for strategic trading.

Algorithm Trading in Asian Currency FX Markets

We investigate a unique EBS foreign exchange dataset that provides each individual order a distinct ID number with a time stamp on entry and another time stamp on exit. Using this dataset for the Australian dollar and the Japanese yen, we measure how long an individual limit order remains in the foreign exchange markets. A large number of limit orders are canceled within a split second, which is evidence for algorithmic trading in the foreign exchange market. While more than 80% of limit orders are canceled in the JPY/USD spot market, the cancelation rates are even higher in the JPY/AUD and AUD/USD spot markets. At the minute frequency, we find weak evidence of correlated cancelation activities among three spot markets. We conclude that the cross-rate JPY/AUD market is characterized by a mixture of algorithm trading and triangular arbitrage trading.

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

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

STUDIES ON FINANCIAL MARKETS IN EAST ASIA

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.

Central bank interventions and limit order behavior in the foreign exchange market

This book will be an important addition to the limited number of books that discuss finance and accounting issues in East Asian countries. While presenting recent empirical studies on finance and accounting in East Asian economies, it also reveals the underlying reasons for remarkable economic growth and emerging performance of the financial markets in the East Asian countries. It introduces newly developed financial products, institutions, governance mechanism, banking policy changes and their implications in the East Asian economies, and discusses the way forward for these economies with recommendations for policy implications. It also contains suggestions for other developing countries trying to achieve rapid growth.