Working Paper

The Evolution of Price Discovery in an Electronic Market

Abstract: We study the evolution of the price discovery process in the euro-dollar and dollar-yen currency pairs over a ten-year period on the EBS platform, a global trading venue used by both manual and automated traders. We find that the importance of market orders decreases sharply over that period, owing mainly to a decline in the information share from manual trading, while the information share of market orders from algorithmic and high-frequency traders remains fairly constant. At the same time, there is a substantial, but gradual, increase in the information share of limit orders. Price discovery also becomes faster, suggesting improvements in market efficiency. The results are consistent with theoretical predictions that in more efficient markets, informed traders tend to use more limit orders.

Keywords: High-frequency trading; Limit orders; Price discovery;

JEL Classification: G14; G15; F31;

https://doi.org/10.17016/FEDS.2020.051

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2020-06-24

Number: 2020-051