Temporal patterns and history of EUR/JPY spread, 2003-2009

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Written by Forex Automaton   
Wednesday, 23 June 2010 13:39

This third article in a series dedicated to patterns and stability of forex spread deals with EUR/JPY. As in other studies, the data come from a popular non-ECN broker. The only surprise here is the unexpected increse of the spread in 2009, both on absolute scale and in relation to the EUR/JPY quote.

The algebra of profit and loss in trading on a margin (follow the link for details) has been discussed before and used in the EUR/JPY spread article to justify the conclusion that not the spread itself but its ratio to the price is of direct iterest to the trader and strategy developer intersted in comparing profitabilities of trading strategies applied to different forex pairs under real-world conditions.

In these studies, spread is defined as half the difference between bid and ask prices. I use tick data from a popular non-ECN forex broker, aggregated with an hour step, for years 2003 through 2009. The spread is aggregated in the following manner.

  • The spread assigned to a tick data point is half the difference between ask and bid prices of that tick. This is consistent with price itself being though of as the middle of the ask and bid difference.

  • The spread assigned to an hour is the largest spread observed in tick data during the hour.

Tokyo 9 1011 1213 14 15 16 17 18 19 20 21 2223 0 1 2 3 4 5 6 7 8
Central Europe 123456789101112 13141516171819202122230
Greenwich 01234567891011 121314151617181920212223
Eastern US 19202122230123456 789101112131415161718

Table 1. Time zone conversion table. Seasonal time shifts, such as daylight saving time, may complicate the picture if the nations choose to enact them on different days, and are ignored.

Fig.1 shows evolution of EUR/JPY spread during a day, for each of the seven years from 2003 through 2009. In the figure, the time axis is split into bins, each bin being 1-hour long. The data from a given year are averaged within the specific bin, inferring the mean and RMS.

Spread evolution during a day, absolute units, EUR/JPY, 2003-2009, CET 1.1 Spread evolution during a day, relative to price, EUR/JPY, 2003-2009, CET 1.2

Fig.1. Evolution of spread during a day, EUR/JPY, 2003-2009. Central European time. The borders of the shaded areas indicate precision of the data, the width of the shaded band being roughly twice the precision, while the data points are located in the middle of the band. 1.1: spread; 1.2: spread/quote (relative spread).

Central Europen time is chosen for the time axis for the following reason. Forex week begins, roughly speaking (since the volume increase is gradual) on Sunday 5pm and ends Friday 6pm Eastern time. It is convenient to define this week to consist of 5 full days, from 6pm Sunday to 6pm Friday New York time. When it's 6pm in New York, it's midnight in Berlin, Paris, Madrid, Rome, Geneva and Frankfurt. These cities use Central European Time or CET. Therefore, the convenience of using CET is that one gets 5 non-interrupted, full 24-hour long trading days per week. Table 1 compares four time zones including major trading centers of the world.

Some immediate conclusions from Fig.1 are:

  • On average, EUR/JPY spread is fairly stable throughout the day. The only feature occuring repeatedly year after year is a spike in spread around lunch time in New York. This artefact does not have a parallel in the daily patterns of market activity and thus its cause is most likely internal to the broker. One may hypothesize that the broker is somewhat under-stuffed during the lunch hour and imposes a spread increase to counter its reduced ability to hedge its client exposure on the external market. Apparently there is little need to do the same during the night hours, as decreasing market activity decreases risks.

    Note that the artefact itself and its discussion in the above paragraph are fully analogous to that for EUR/USD.

  • The spread stayed on the level of 2 pips in 2005, 2006, 2007 and 2008 and then was increased back to where it was in 2003-2004 -- a worrisome development. Note that USD/JPY and EUR/USD spreads have not been increased.

Spread evolution during a day, EUR/JPY, 2003-2009, CET

Fig.2. Evolution of relative spread (spread/price) during a week, EUR/JPY, 2003-2009. Central European time. The borders of the shaded areas indicate precision of the data, the width of the shaded band being roughly twice the precision, while the data points are located in the middle of the band.

In much the same approach as Fig.1, Fig.2 shows spread evolution during a five-day forex week. Here a stable pattern is the abnomally high spreads in the first (and sometimes last) trading hours of the week.

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Last Updated ( Friday, 29 October 2010 11:47 )