Investigating the orderbook of the EUR/USD exchange rate

In this project, quant analysts Yasser Mahfoud and Frej Örnberg, investigate the liquidity of the forex market, specifically the EUR/USD exchange rate by simulating trading in historical book data, with price and volume quotes for the 20 topmost levels of the ask and bid.

Liquidity describes the ease of which an asset can be bought or sold, considering quantities available as well as the resulting price of a trade. Two kinds of orders were used in this project for investigation, the Market Order and the Immediate or Cancel Order (IOC). The Market Order operates on specific tick in time while for the IOC order, if the order amount is larger than the available quantity then the remainder is bought or sold from the following tick. This process is repeated until the order is complete.

During the European working hours, there are higher quantities available for buying and selling, and the relative cost of increasing the order size is lower than during the rest of the day. Before the break at 22:00 to 22:05, liquidity plummets with lower quantities available and higher costs of execution. The market is then over the course of the following one to two hours restored.

The relationship between price and quantity for the Market Order was also investigated and found to be linear with a very high coefficient of determination, except for the period around 22:00 which is reasonable given the low to no volumes available for trading at that time.

To read the full report, please see attached PDF below: