Microstructure of trading systems and exchange rate stability


In my view, in order to reduce the volatility of the exchange rate should be introduced to regulate the use of limited market orders. MICEX charges on transactions in SELT commission in an amount dependent on the total amount of transactions on the trading session. The amount of commission varies from 0.002% to 0.004% of the volume of U.S. dollars. The nature of applications does not differ, although the commission, in my opinion, for a limited orders should be higher.

Impact on the spread pattern of trade

As already mentioned, the spread size is directly related to the volatility of the exchange rate. The spread is a measure of market liquidity. Any trader eventually plans at some point in the future to realize the existing asset. This sale may be associated with indirect costs, such as low liquidity and wide spreads.

Given the potential indirect costs, traders or discount the price of the financial asset, or expect greater return on your investment in it. For this reason, a large spread is an indicator of the current and future price volatility. In addition, the spread reflects the uncertainty of the upcoming change in the situation, an indicator appears "mood of the market."

Extremely liquid market with a narrow spread is usually a sign that the market is dominated by irrational traders tend to underestimate the current information derived from the order flow. High liquidity - a sign of the positive attitude of irrational traders and low expectations of price changes in the near future. Therefore, in order to stabilize the exchange rate should seek to minimize the spread.

What is the relationship between the dynamics of the exchange rate and a spread in the domestic foreign exchange market? If we take the spread difference between the maximum and the minimum purchase price of the sale price in the SELT, the statistical analysis shows a strong direct positive relationship between the change in the nominal exchange rate of the trading session and the size of the spread. I spent a correlation-regression analysis available statistics of daily trading on the MICEX from 2000-2001 and found that a coefficient of determination equal to 0.64, an increase in the spread is a penny leads to an impairment of the domestic currency to 0.9045 cent.

What kind of market structure provides a more narrow spreads and high liquidity of the market? As the study by the American economist J. Seppi, market experts is the most liquid. Small retailers and large institutional investors prefer hybrid markets like the New York Stock Exchange, where professionals compete with limited orders for the execution of market orders. Investors "mediocre" choose markets that prevail limited orders, such as electronic trading systems.

As shown by Seppi, experts put prices slightly better than offer limited orders, resulting likelihood of execution last drops. This behavior was also confirmed by specialists expert NYSE J. Sofyanosom who led the curve depending on the size of income professionals deal. The curve has the shape of the letter U, ie most of the income specialists account for small and large operations performed on a market order. Due to the fact that business professionals rests on maintaining large volume of trade, they narrow the spreads in order to get an additional order flow. At the same time their behavior reduces the volatility of the market, because they compete with limited orders that tend to destabilize the market. This is especially noticeable in a crisis situation, when volatility is maximized. Typically, during a large-scale financial assets are impaired traders refuse orders in favor of the limited market. During the crisis, the probability of erroneous pricing is so high that it becomes optimal for operations through market orders. On hybrid markets, this means that traders tend to trade with professionals, offering narrower spreads. Similarly, the foreign exchange markets during the crisis moved from trading electronic trading systems in the interbank market at the dealer market.