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I'm working with high frequency FX data. Because the FX market is a decentralized market, different traders often have slightly different prices at the same moment. I can see how this would potentially affect data quality, and I remember reading some work in which the author dismissed the use of ask quotes as being low quality data, so they only used bids. I'm afraid have forgotten who/where this was.

My question is: is it a common perception in literature that high frequency FX ask quotes are no good, and would you have any references for me that make this point?

EDIT: I've not yet accepted an answer, because I am looking for a reference that makes the point either way.

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I think that is coming from the bond market where there in the past has been the idea of "marking to the bid". People would usually ask for a two-way-market and most of the time they would be expecting that the bid would be hit.

With FX data you are looking at actionable markets so they are all good.

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  • $\begingroup$ This 'marking to the bid' sparks a memory, and it may be the explanation I am looking for. Are you sure that this is not the case in FX markets? I'm asking because I transformed my data from ticks, and I remember that each tick contained a bid and an ask quote. This would be consistent with the practice of marking to the bid, wouldn't it? $\endgroup$ – user20644 May 6 '16 at 14:10
  • $\begingroup$ I think that you are thinking of back in the day when everyone was just long everything so we marked to the bid. Since then positions are much more longs and shorts and L2,L3, etc. So it's not as prevalent. $\endgroup$ – JoshK May 6 '16 at 14:27
  • $\begingroup$ With real time ECN data it is marketable. There can be certain exceptions in FX, but not particular to the bid or the ask. For example, if your Trianna doesn't let you trade with Citi and Citi is the best offer, then you wouldn't be able to lift it. But That would apply if Citi was the best bid too. $\endgroup$ – JoshK May 6 '16 at 14:28
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The way the FX market prices is to get a baseline mid price and then apply skew(s) and spread(s). So the answer to your question is no. As for references, the way the FX market works is that liquidity in currency pairs is pushed either to EBS or Reuters. That's so that there isn't a monopoly on prices. For example, the most trading in the EURUSD takes place on EBS. For GBPUSD it's Reuters. And so on.... So actually the market isn't as "decentralised" as it's made out to be...

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dismissing ask (offer) data in fx makes no sense (not sure if it does anywhere else either)..

you need to build your own mid-price (don't just subtract bid from offer like most do unless you run a very simple small clip-size taker model).

you then take the mid-price to make your own bids / offers. not sure what you're trying to do - since you mentioned HFT - guess you are trying to make a market - so setting your mid-price is crucial for you to be able to do anything in fx, in order to do that, you need to see both sides of the market (bids and offers).

hope helps ;

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