IDEAS home Printed from https://ideas.repec.org/a/eee/glofin/v60y2024ics104402832400019x.html
   My bibliography  Save this article

Which witch is which? Deconstructing the foreign exchange markets activity

Author

Listed:
  • Orlov, Alexei G.
  • Sharma, Rajiv

Abstract

Using regulatory data on transactions and positions, we provide a comprehensive overview of the activity in the foreign exchange (FX) derivatives markets, including futures, swaps, and options, covering exchange-traded and over-the-counter (OTC) products. The heretofore publicly unavailable statistics trace the behavior of dealers, hedge funds, asset managers, pension funds, insurance companies, and sovereign and supranational institutions before, during, and in the aftermath of the market stress of March 2020. We show that when the COVID market shock sharply increased the demand for the US dollar (USD), certain client sectors (e.g., hedge funds and sovereigns), along with dealers, provided USD liquidity by significantly increasing their long-USD swap positions. We find that client sectors are heterogeneous with respect to their liquidity needs and that their aggregate positions are small compared to dealer inventories. In addition to the inter-sector heterogeneity, we highlight the heterogeneity of firms within a client sector by focusing on hedge funds' USD/Euro swap positions—the most active client sector and currency pair in our data. Conversely, the FX dealers follow similar strategies, are competitive, and engage in multilateral netting arrangements to significantly reduce their risk exposure. Finally, using a sample of hedge funds that simultaneously participated in swaps and futures markets, we present evidence on trading volumes and frequencies that suggests that the OTC market is the preferred space for FX risk transfer, whereas the exchange-traded derivatives market serves the price discovery and immediacy functions for smaller trades.

Suggested Citation

  • Orlov, Alexei G. & Sharma, Rajiv, 2024. "Which witch is which? Deconstructing the foreign exchange markets activity," Global Finance Journal, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:glofin:v:60:y:2024:i:c:s104402832400019x
    DOI: 10.1016/j.gfj.2024.100947
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S104402832400019X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.gfj.2024.100947?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Claudio Borio & Robert N McCauley & Patrick McGuire, 2022. "Dollar debt in FX swaps and forwards: huge, missing and growing," BIS Quarterly Review, Bank for International Settlements, December.
    2. Mathias Drehmann & Vladyslav Sushko, 2022. "The global foreign exchange market in a higher-volatility environment," BIS Quarterly Review, Bank for International Settlements, December.
    3. Torsten Ehlers & Bryan Hardy, 2019. "The evolution of OTC interest rate derivatives markets," BIS Quarterly Review, Bank for International Settlements, December.
    4. Viswanathan, S. & Wang, James J. D., 2002. "Market architecture: limit-order books versus dealership markets," Journal of Financial Markets, Elsevier, vol. 5(2), pages 127-167, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrick McGuire & Andreas Schrimpf & Nikola Tarashev, 2022. "Foreword: OTC foreign exchange and interest rate derivatives markets through the prism of the Triennial Survey," BIS Quarterly Review, Bank for International Settlements, December.
    2. Julian Caballero & Alexis Maurin & Philip Wooldridge & Dora Xia, 2022. "The internationalisation of EME currency trading," BIS Quarterly Review, Bank for International Settlements, December.
    3. Wang, Mengjiao & Liu, Jianxu & Yang, Bing, 2024. "Does the strength of the US dollar affect the interdependence among currency exchange rates of RCEP and CPTPP countries?," Finance Research Letters, Elsevier, vol. 62(PA).
    4. Hwang, Hae-shin & Jindapon, Paan, 2020. "Market making with convex quotes," Finance Research Letters, Elsevier, vol. 37(C).
    5. J. Doyne Farmer & Austin Gerig & Fabrizio Lillo & Henri Waelbroeck, 2013. "How efficiency shapes market impact," Quantitative Finance, Taylor & Francis Journals, vol. 13(11), pages 1743-1758, November.
    6. Chang, Hao-Wen & Lin, Chinho, 2023. "Currency portfolio behavior in seven major Asian markets," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 540-559.
    7. Scheicher, Martin, 2023. "Intermediation in US and EU bond and swap markets: stylised facts, trends and impact of the coronavirus (COVID-19) crisis in March 2020," ESRB Occasional Paper Series 24, European Systemic Risk Board.
    8. Charles M. Kahn & Stephen F. Quinn & William Roberds, 2023. "The Fed and Its Shadow: A Historical View," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2023(6), pages 1-32, October.
    9. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2009. "Dynamic order submission strategies with competition between a dealer market and a crossing network," Journal of Financial Economics, Elsevier, vol. 91(3), pages 319-338, March.
    10. Sylvain Mignot & Gabriele Tedeschi & Annick Vignes, 2012. "An Agent Based Model of Switching: The Case of Boulogne S/mer Fish Market," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 15(2), pages 1-3.
    11. Alain Chaboud & Dagfinn Rime & Vladyslav Sushko, 2023. "The foreign exchange market," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 12, pages 253-275, Edward Elgar Publishing.
    12. Bryan Hardy & Goetz von Peter, 2023. "Global liquidity: a new phase?," BIS Quarterly Review, Bank for International Settlements, December.
    13. Sylvain Friederich & Richard Payne, 2007. "Dealer Liquidity in an Auction Market: Evidence from the London Stock Exchange," Economic Journal, Royal Economic Society, vol. 117(522), pages 1168-1191, July.
    14. Xiaoxi Liu & Jinming Xie, 2023. "Forecasting swap rate volatility with information from swaptions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(4), pages 455-479, April.
    15. Linlin Ye, 2016. "Understanding the Impacts of Dark Pools on Price Discovery," Papers 1612.08486, arXiv.org.
    16. Jonas Becker & Maik Schmeling & Andreas Schrimpf, 2024. "Global Bank Lending and Exchange Rates," BIS Working Papers 1161, Bank for International Settlements.
    17. Iwatsubo, Kentaro & Rhee, S. Ghon & Zhang, Ye Zhou, 2023. "Dealership versus continuous auction: Evidence from the JASDAQ market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    18. Bryan Hardy & Sonya Zhu, 2023. "Unpacking international banks' deposit funding," BIS Quarterly Review, Bank for International Settlements, September.
    19. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2009. "Dynamic order submission strategies with competition between a dealer market and a crossing network," Journal of Financial Economics, Elsevier, vol. 91(3), pages 319-338, March.
    20. Philip Wooldridge, 2019. "FX and OTC derivatives markets through the lens of the Triennial Survey," BIS Quarterly Review, Bank for International Settlements, December.

    More about this item

    Keywords

    Foreign exchange markets; FX swaps; FX forwards; FX futures; FX options; FX spot markets; COVID market stress;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:glofin:v:60:y:2024:i:c:s104402832400019x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620162 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.