English Version
I. INTRODUCTION
The study of securities market microstructure deals with the behavior of market participants in securities markets, the information effects and institutional rules of those markets, (Flood,1991 p.52). This paper focuses on the behavior of market agents and market characteristics rather than on the influence of macro fundamentals.
The market participant behavior has an impact on the market inefficiency. Moreover, the interaction of institutional and behavioral factors generates the bid-ask spread. Bid is the buying price (from market maker»s point of view), and ask is the selling price (from the same point of view). The spread is the difference between the ask price and bid price.
The study of securities market microstructure deals with the behavior of market participants in securities markets, the information effects and institutional rules of those markets, (Flood,1991 p.52). This paper focuses on the behavior of market agents and market characteristics rather than on the influence of macro fundamentals.
The market participant behavior has an impact on the market inefficiency. Moreover, the interaction of institutional and behavioral factors generates the bid-ask spread. Bid is the buying price (from market maker»s point of view), and ask is the selling price (from the same point of view). The spread is the difference between the ask price and bid price.
Dealer always shifts the quotes after buying and/ or selling a currency. This meant that the dealer was most concerned with the inventory cost since holding a currency inventory to provide immediacy imposes opportunity costs and the risk of changes in inventory value. The next question is how important is the inventory cost as component of the bid-ask spreads. Employing the hard currencies (US, Deutsche Mark, and Japanese Yen) data, we found that the inventory cost is the most importance component (Danila, 2000). However, it might be not the case when we use soft currency, namely Indonesia rupiah. By recognizing the behavior of the traders in quoting the bid and ask prices, we will observe the behavior of exchange rate in the short-run, which is very important for the market players who deal with it in their business.
This paper is organized as follows: the theoretical background will be developed in the next section, followed by the discussion of the empirical analysis.
II. THEORY
II. 1. The Concept
As mentioned in the previous section that the interaction of institutional and behavioral factors generates the bid-ask spread. Quoted prices are different from transaction prices. Quotes are only indicative; they do not represent the bid and ask prices at which a bank will enter into a transaction. The trade activity within the inter-bank market is different from the posting of indicative quotes. However, the trading and quote-making decisions are not made independently from one another (Evans, 1998).
Flood (1991, p.64) argues that the bid-ask spread violates the law of one price, since it prices the same commodity differently. However, there are several reasons to explain this apparent inconsistency. We argue in the next section that the bid-ask spread covers three types of costs: order-processing costs, asymmetric-information costs, and inventory carrying costs (Bessembinder, 1994 p.322).
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This paper is organized as follows: the theoretical background will be developed in the next section, followed by the discussion of the empirical analysis.
II. THEORY
II. 1. The Concept
As mentioned in the previous section that the interaction of institutional and behavioral factors generates the bid-ask spread. Quoted prices are different from transaction prices. Quotes are only indicative; they do not represent the bid and ask prices at which a bank will enter into a transaction. The trade activity within the inter-bank market is different from the posting of indicative quotes. However, the trading and quote-making decisions are not made independently from one another (Evans, 1998).
Flood (1991, p.64) argues that the bid-ask spread violates the law of one price, since it prices the same commodity differently. However, there are several reasons to explain this apparent inconsistency. We argue in the next section that the bid-ask spread covers three types of costs: order-processing costs, asymmetric-information costs, and inventory carrying costs (Bessembinder, 1994 p.322).
Journals for full download on the link below
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