High-Frequency Trading in FX Markets

Anton Golub, Alexandre Dupuis and Richard B Olsen

This chapter provides an overview of the landscape and the basic mechanics of the foreign exchange (FX) markets and their organised exchanges. We explain algorithmic trading in the foreign exchange and analyse trading frequencies of different types of market participants. We continue with an overview of the key insights of academic literature of the impact of high-frequency (HF) traders in the foreign exchange market and discuss actual market events where there have been short-term price disruptions. We focus on the behaviour of the high-frequency traders involved.

There is definite empirical evidence of the path dependency of the price trajectory; a black swan event may be triggered at any time due to microstructure effects that are not linked to fundamental factors. Organised trading venues are exploring ways to prevent microstructure effects distorting price action, though without reaching a satisfactory solution so far. This chapter proposes a new method to achieve price stability. We suggest that the queuing system of limit order books rewards market participants by offering competitive two-way prices; model simulations presented here indicate that this might well enhance

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