Liquidity in Buy-Side FX Markets

Category: Finance Brown Bag Seminar
When: 26 June 2024
, 14:00
 - 15:00
Where: HoF E.20 (DZ Bank)
Speaker: Hannes Halder (Goethe University)

Abstract: I examine liquidity in foreign exchange markets (FX) received by buy-side clients on a multi-dealer platform, studying both price qualities across FX products as well as the quote dispersion across dealers. Four main findings emerge. First, swaps are substantially more liquid than spots and forwards. Second, clients improve quotes by locating the best among dispersed dealer quotes. Tight spreads in combination with bid-skewing frequently leads to inverted inside spreads (arbitrage). Third, spot liquidity is less affected from market stress while swap liquidity deteriorates. The evidence is consistent with theories of inventory control in which dealers skew their bids for inventory management suggesting that the clients' trade flow provides liquidity to dealers laying off their inventories.