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Title: Liquidity in the FX market: Empirical evidence from an aggregator Authors:  Milla Siikanen - Tampere University of Technology (Finland) [presenting]
Juho Kanniainen - Tampere University of Technology (Finland)
Ulrich Noegel - big xyt AG (Germany)
Abstract: In foreign exchange (FX) trading, an aggregator is used to connecting traders with liquidity providers (LPs). In an aggregator, a trader receives a continuous stream of bid and ask quotes from a predefined set of LPs, and the difference between the best bid and ask prices over a set of liquidity streams is called an inside spread. We empirically study liquidity in an FX aggregator. We show that, on average, traders obtain a relatively tight spread already with four or five streams; the use of more streams yields a marginal benefit only. For given numbers of liquidity streams, we determine the optimal combinations of streams minimizing the spread. The optimal combinations are obtained using a genetic algorithm. Our findings indicate that most of the traders could---at least in theory---reduce the average spread by more than half with the optimal combination of streams, and a trader could save up to \$0.18 basis points per euro traded. However, traders may not be able to fully exploit the improvements in spreads because, in practice, the traders are not completely free to choose just any liquidity streams in the aggregator. On the other hand, if the traders changed their selected liquidity streams, the LPs would be likely to change their quoting behavior. In addition, we find that a model proposed for a liquidity aggregator in an earlier research fits our empirical data accurately, even under the quite simplistic assumptions of homogeneous LPs.