Working Paper: NBER ID: w23327
Authors: Takatoshi Ito; Masahiro Yamada
Abstract: This paper examines the consequences of the 2015 reform on the London fixing in the interbank forex market, which resulted from finding and imposing a penalty on banks’ collusive behavior around the fixing window. The banks changed their behavior after the reform, and the volume spike in the fixing window disappeared. However, the anomalies on price dynamics reported in the previous literature still exist, and banks’ passive trading strategy generates another predictability in the price movement. A theoretical model of optimal execution is used to calibrate the execution of fixing transactions by banks, and evaluate the increase in the cost and risks of fixing trades incurred by the banks' behavior. This paper is the first to examine the efficiency of banks’ behavior after the reform. The volume pattern during the fixing time window suggests that banks, by avoiding (even the appearance of) collusion, now incur the costs of executing customers’ orders.
Keywords: Forex market; London fixing; Bank behavior; Regulatory reform
JEL Codes: D43; D47; F30; F31; F33; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reform implemented in February 2015 (E69) | Behavior of banks around the London fixing window (G21) |
| Behavior of banks around the London fixing window (G21) | Disappearance of the volume spike during the fixing window (C22) |
| Reform implemented in February 2015 (E69) | Changes in trading volume and price behavior (G10) |
| Changes in trading volume and price behavior (G10) | Predictability in price movements (G17) |
| Trading strategies modified by banks (G15) | More even distribution of trading volume across the fixing window (D39) |
| Reform implemented in February 2015 (E69) | Costs associated with executing customer orders (D23) |
| Volume pattern during the fixing time window (C22) | Changes in market dynamics (D49) |
| Reversal of prices after the fixing period (P22) | Change in market dynamics (D49) |