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Fixing the Fix? Assessing the Effectiveness of the 4pm Fix Benchmark

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Abstract

We examine the design and effectiveness of the 4pm Fix, the most important benchmark in FX markets, using a unique dataset of trader identified order book data from an inter- dealer venue. We propose and examine new measures of benchmark quality and examine changes to market liquidity and trader behaviour. Benchmark quality, measured as price efficiency and robustness, improves after the lengthening of the fix window to 5 minutes, but comes at the cost of a significant increase in tracking error for users of the benchmark. We also find that quoted spreads and price impact increase following the window lengthening, with HFTs trading more aggressively during the fix.

Suggested Citation

  • Martin D. D. Evans & Peter O'Neill & Dagfinn Rime & Jo Saakvitne, 2018. "Fixing the Fix? Assessing the Effectiveness of the 4pm Fix Benchmark," Working Papers gueconwpa~18-18-18, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~18-18-18
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    Cited by:

    1. Aquilina, Matteo & Ibikunle, Gbenga & Mollica, Vito & Steffen, Tom, 2022. "The visible hand: benchmarks, regulation, and liquidity," Journal of Financial Markets, Elsevier, vol. 61(C).
    2. Ingomar Krohn & Philippe Mueller & Paul Whelan, 2024. "Foreign Exchange Fixings and Returns around the Clock," Journal of Finance, American Finance Association, vol. 79(1), pages 541-578, February.
    3. 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.
    4. Hauser, Shmuel & Kedar-Levy, Haim & Milo, Orit, 2022. "Price discovery during parallel stocks and options preopening: Information distortion and hints of manipulation," Journal of Financial Markets, Elsevier, vol. 59(PA).
    5. Evans, Martin, 2020. "Exchange Rates and Liquidity Risk," MPRA Paper 102702, University Library of Munich, Germany.
    6. Gbenga Ibikunle & Vito Mollica & Qiao Sun, 2021. "Jumps in foreign exchange spot rates and the informational efficiency of currency forwards," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1201-1219, August.
    7. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.

    More about this item

    Keywords

    Foreign Exchange; Trading; Fix Benchmark;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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