The electronic trading systems and bid-ask spreads in the foreign exchange market

This paper examines the impact of electronic trading systems on the bid-ask spreads in the foreign exchange market. The paper finds: first, the EBS reduces spreads significantly; second, the EBS is more influential than the Reuters system for the currency pair DEM/USD; third, dealers with information advantage tend to quote relatively wider spreads with the new systems; fourth, geographical differences in market liquidity are reduced through the new systems, and finally, the effects occur immediately and persist in the long-term. Thus, both proposed positive and negative impacts of the electronic systems are found to be true in this paper, but our findings also suggest that positive effects dominate and the electronic systems overall increase FX market liquidity.