McGroarty, Frank, ap Gwilym, Owain and Thomas, Stephen H.
The components of electronic inter-dealer spot FX bid-ask spreads
Journal of Business Finance and Accounting, 34, (9-10), . (doi:10.1111/j.1468-5957.2007.02051.x).
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This paper applies an established bid-ask spread decomposition model to the inter-dealer spot foreign exchange market. In addition, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order-driven markets and which is found to produce more plausible results than the original model. Price clustering is introduced as a new explanatory factor within this framework and is shown to be vitally important in understanding the composition of bid-ask spreads in this market.
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