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The Role of High-Frequency Traders in the Foreign Exchange Market Bid-Ask Spreads

Author

Listed:
  • Carlos Lenczewski

    (Warsaw School of Economics, Banking and Commercial Insurance Institute)

Abstract

This paper presents a review of the literature on high-frequency traders and their presence in the microstructure analysis of the foreign exchange, and how they fall under the determinants of the bid-ask spread of foreign exchange rates. The bid-ask spread is one of the key elements of the microstructure approach in the foreign exchange market. Understood as the difference between the price a participant buys the base currency and the price for which the participant sells that same currency. The understanding of what affects spread is important to assess dealers rent, price fairness and transparency and for transaction costs both in trading systems and settlement systems. It is shown, that algorithmic trading, and for that high-frequency traders, do not have a negative role in volatility, and are not a reason for widening bid-ask spreads. In fact, evidence shows that their presence is a key factor in the spreads being more narrow.

Suggested Citation

  • Carlos Lenczewski, 2016. "The Role of High-Frequency Traders in the Foreign Exchange Market Bid-Ask Spreads," EUSP Department of Economics Working Paper Series 2016/01, European University at St. Petersburg, Department of Economics.
    • Handle: RePEc:eus:wpaper:ec2016_01
    as

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    File URL: https://eusp.org/sites/default/files/archive/ec_dep/wp/Ec-01_16.pdf
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    References listed on IDEAS

    as
    1. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    2. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
    3. David A. Hsieh & Allan W. Kleidon, 1996. "Bid-Ask Spreads in Foreign Exchange Markets: Implications for Models of Asymmetric Information," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 41-72, National Bureau of Economic Research, Inc.
    4. Michael Kearns & Alex Kulesza & Yuriy Nevmyvaka, 2010. "Empirical Limitations on High Frequency Trading Profitability," Papers 1007.2593, arXiv.org, revised Sep 2010.
    5. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers 49, Brandeis University, Department of Economics and International Business School.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    high-frequency trading; spread; foreign exchange; microstructure;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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