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Human vs. high-frequency traders, penny jumping, and tick size

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  • Mahmoodzadeh, Soheil
  • Gençay, Ramazan

Abstract

This paper examines changes in market quality resulting from the smaller tick size of the interbank foreign exchange market. Coupled with the lower tick size, the special composition of traders and their order placement strategies created a suitable environment for high-frequency traders (HFT’s) to implement sub-penny jumping strategy to front-run human traders. We show that the spread declined following the introduction of decimal pip pricing. However, benefits of spread reduction were mostly absorbed by the HFT’s. Market depths were also significantly reduced with the occupation of the top of the order book by HFT’s. This new environment changed the market maker-market taker composition between different traders and altered price impacts of the order flows.

Suggested Citation

  • Mahmoodzadeh, Soheil & Gençay, Ramazan, 2017. "Human vs. high-frequency traders, penny jumping, and tick size," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 69-82.
    • Handle: RePEc:eee:jbfina:v:85:y:2017:i:c:p:69-82
    DOI: 10.1016/j.jbankfin.2017.08.015
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    Cited by:

    1. Chaboud, Alain & Hjalmarsson, Erik & Zikes, Filip, 2021. "The evolution of price discovery in an electronic market," Journal of Banking & Finance, Elsevier, vol. 130(C).
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    3. Lin William Cong & Xi Li & Ke Tang & Yang Yang, 2021. "Crypto Wash Trading," Papers 2108.10984, arXiv.org.
    4. 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).
    5. Ekinci, Cumhur & Ersan, Oğuz, 2022. "High-frequency trading and market quality: The case of a “slightly exposed” market," International Review of Financial Analysis, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Interbank foreign exchange market; Tick size; Market quality;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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