Results of a NBER study based upon spot yen/dollar one minute bid-ask quotes and transactions provided by EBS.
Major findings include the following:
- Activity—measured by the number of quote entries (price changes) and the number of deals—and bid-ask spreads have a distinct intra-day pattern;
- Activity is high in the beginning hours of the three major currency markets—Tokyo, London, and New York;
- There is little evidence that the activity increases toward the end of business hours in the three major markets, even during the closing hours of New York on Fridays, thus there is little evidence of U-shape pattern—this is a new observation;
- Activity is quite low during the lunch hours of Tokyo and London, late afternoon hours of New York;
- An average bid-ask spread is narrow (wide), when quote and deal frequencies are high (low, respectively), except the beginning hour of Tokyo (GMT 0), when the bid-ask spread is wide despite high levels of activity.
This data set has advantage over the frequently-used, indicative quotes of a foreign exchange market tick-by-tick data set, such as FXFX of Reuters, in at least in two important aspects. First, the quotes in the electronic broking are “firm” quotes, in that the banks are committed to trade at those quoted prices. The firm quotes can be hit, without recourse, for transactions by any counter-party in the system, provided that the counterparty has a credit line with the bid/ask posting institution. In contrast, the indicative quotes of FXFX screen are those input by dealers to give market information without any commitment for trade. Second, transactions data that are available in the electronic broking system is simply not available in the FXFX screen.