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Judgment day: Algorithmic trading around the Swiss franc cap removal

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  • Breedon, Francis
  • Chen, Louisa
  • Ranaldo, Angelo
  • Vause, Nicholas

Abstract

A key issue for decentralised markets like FX is how the market responds to extreme situations. Using data on FX transactions with a precise identification of Algorithmic trading (AT), we find that AT, broadly defined, appears to have contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015 by withdrawing liquidity and generating uninformative volatility. We also find that the Swiss National Bank, after initially stepping aside, played an important role, though more by signalling rather than trading. This perhaps explains why human trading – that could most easily interpret those signals – was important in stabilising the market.

Suggested Citation

  • Breedon, Francis & Chen, Louisa & Ranaldo, Angelo & Vause, Nicholas, 2023. "Judgment day: Algorithmic trading around the Swiss franc cap removal," Journal of International Economics, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:inecon:v:140:y:2023:i:c:s0022199622001453
    DOI: 10.1016/j.jinteco.2022.103713
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    Cited by:

    1. Giancarlo Corsetti & Romain Lafarguette & Arnaud Mehl, 2019. "Fast Trading and the Virtue of Entropy: Evidence from the Foreign Exchange Market," Discussion Papers 1914, Centre for Macroeconomics (CFM).
    2. Hertrich, Markus, 2020. "Foreign exchange interventions under a one-sided target zone regime and the Swiss franc," Discussion Papers 21/2020, Deutsche Bundesbank.
    3. Arumugam, Devika & Prasanna, P. Krishna & Marathe, Rahul R., 2023. "Do algorithmic traders exploit volatility?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    4. Ranaldo, Angelo & Somogyi, Fabricius, 2021. "Asymmetric information risk in FX markets," Journal of Financial Economics, Elsevier, vol. 140(2), pages 391-411.
    5. Steffen, Viktoria, 2023. "A literature review on extreme price movements with reversal," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    6. Joseph, Andreas & Vasios, Michalis & Maizels, Olga & Shreyas, Ujwal & Tanner, John, 2019. "OTC microstructure in a period of stress: a multi‑layered network approach," Bank of England working papers 832, Bank of England.
    7. Joseph, Andreas & Vasios, Michalis, 2022. "OTC Microstructure in a period of stress: A Multi-layered network approach," Journal of Banking & Finance, Elsevier, vol. 138(C).
    8. Markus Hertrich, 2022. "Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 450-489, May.
    9. Ranaldo, Angelo & de Magistris, Paolo Santucci, 2022. "Liquidity in the global currency market," Journal of Financial Economics, Elsevier, vol. 146(3), pages 859-883.

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    More about this item

    Keywords

    Algorithmic trading; Swiss franc; Market liquidity; Price efficiency; Central bank intervention;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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