Publication Type

Working Paper

Version

publishedVersion

Publication Date

6-2023

Abstract

In this paper, we characterise the liquidity provision and price discovery roles of dealers and HFTs in the FX spot market during the sample period between 2012 and 2015. We find that they have different responses to adverse market conditions: HFT liquidity provision is less sensitive to spikes in market-wide volatility, while dealer bank liquidity is more robust ahead of scheduled macroeconomic news announcements when adverse selection risk is high. In periods of extreme levels of volatility, such as the `Swiss De-peg' event in our sample, HFTs appear to withdraw almost all liquidity while dealers remain. In normal times, we also find that HFTs contribute to market liquidity by passively trading against the pricing errors created by dealers' aggressive trade flows. On price discovery, HFTs contribute the dominant share, mostly through their high-frequency quote updates which incorporate public information. In contrast, dealers contribute to price discovery more through trades that impound private information.

Keywords

HFT, Dealer Banks, Liquidity, Price Discovery, FX

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

First Page

1

Last Page

64

Identifier

10.2139/ssrn.4349184

Publisher

Swiss Finance Institute, Research Paper Series, No. 23-48

City or Country

Geneva

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.2139/ssrn.4349184

Download

Share

COinS