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Dealer Trading at the Fix

Author

Listed:
  • Carol Osler

    (Brandeis University)

  • Alasdair Turnbull

    (Clarkson University)

Abstract

This paper develops a model of dealer conduct – and misconduct – at the London 4 pm fix, a major currency market benchmark. The analysis clarifies the dealers’ incentives and strategies, helps explain why fix volatility remains high despite reforms, and provides insights relevant to benchmark design. Fix prices will be unusually volatile without collusion. Collusion is profitable because it shuts down a form of free-riding in which dealers front-run each other. The price trend accelerates more as the fix approaches under collusion than under independent trading. Statistical tests detect this shift around 2008, when major banks admit their dealers began colluding.

Suggested Citation

  • Carol Osler & Alasdair Turnbull, 2016. "Dealer Trading at the Fix," Working Papers 101R, Brandeis University, Department of Economics and International Business School, revised Jun 2017.
    • Handle: RePEc:brd:wpaper:101r
    as

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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP101R.pdf
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    References listed on IDEAS

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    Cited by:

    1. Martin D. D. Evans, 2019. "Front-Running and Collusion in Forex Trading," Working Papers gueconwpa~19-19-02, Georgetown University, Department of Economics.
    2. Ito, Takatoshi & Yamada, Masahiro, 2018. "Did the reform fix the London fix problem?," Journal of International Money and Finance, Elsevier, vol. 80(C), pages 75-95.
    3. Ito, Takatoshi & Yamada, Masahiro, 2017. "Puzzles in the Tokyo fixing in the forex market: Order imbalances and Bank pricing," Journal of International Economics, Elsevier, vol. 109(C), pages 214-234.
    4. 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.

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