“Every move you make, every step you take, I’ll be watching you” – the quest for hidden orders in the interbank FX spot market

In the paper we seek to investigate different liquidity or information-oriented factors that exert an impact on the submission of iceberg (i.e., partially hidden) orders in the Reuters Dealing Spot 3000 Matching System, the major interbank order-driven market for EUR/PLN spot trading. With this empirical analysis, we present the first – to our knowledge – market microstructure study on the order exposure decisions in FX markets. Our results indicate that the decision whether to hide a part of the submitted order size is significantly influenced by order attributes, measures of the order book shape, and the prevailing market conditions. Thus, we evidence that FX dealers perform a constant monitoring of time-varying market conditions and constantly adjust their individual trading decisions with regard to the continuously changing market environment. The most significant factors explaining order exposure include the size of submitted order and the level of its aggressiveness, different measures of the instantaneous liquidity of the market, the time of a day, previously observed returns, volatility, and the types of orders previously observed. When having taken into account all of these explanatory factors that may be either observable or unobservable by other market participants, the prediction accuracy of the endogeneity-corrected probit model for the decision whether to submit an iceberg order is very high.