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: points
Ten-second timescale: 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. LOB top “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