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Judgement Day: algorithmic trading around the Swiss franc cap removal

Author

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  • Breedon, Francis

    (School of Economics and Finance, Queen Mary University of London)

  • Chen, Louisa

    (School of Business, Management and Economics, University of Sussex)

  • Ranaldo, Angelo

    (Swiss Institute of Banking and Finance, University of St. Gallen)

  • Vause, Nicholas

    (Bank of England)

Abstract

A key issue raised by the rapid growth of computerised algorithmic trading is how it responds in extreme situations. Using data on foreign exchange orders and transactions that includes identification of algorithmic trading, we find that this type of trading contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015, which was an event that came as a complete surprise to market participants. In particular, we find that algorithmic traders withdrew liquidity and generated uninformative volatility in Swiss franc currency pairs, while human traders did the opposite. However, we find no evidence that algorithmic trading propagated these adverse effects on market quality to other currency pairs.

Suggested Citation

  • Breedon, Francis & Chen, Louisa & Ranaldo, Angelo & Vause, Nicholas, 2018. "Judgement Day: algorithmic trading around the Swiss franc cap removal," Bank of England working papers 711, Bank of England.
  • Handle: RePEc:boe:boeewp:0711
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    Cited by:

    1. Joseph, Andreas & Vasios, Michalis & Maizels, Olga & Shreyas, Ujwal & Tanner, John, 2019. "OTC microstructure in a period of stress: a multi‑layered network approach," Bank of England working papers 832, Bank of England.
    2. Corsetti, G. & Lafarguette, R. & Mehl, A., 2019. "Fast Trading and the Virtue of Entropy: Evidence from the Foreign Exchange Market," Cambridge Working Papers in Economics 1970, Faculty of Economics, University of Cambridge.
    3. Hertrich, Markus, 2020. "Foreign exchange interventions under a one-sided target zone regime and the Swiss franc," Discussion Papers 21/2020, Deutsche Bundesbank.
    4. Ranaldo, Angelo & Somogyi, Fabricius, 2021. "Asymmetric information risk in FX markets," Journal of Financial Economics, Elsevier, vol. 140(2), pages 391-411.

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    More about this item

    Keywords

    Swiss franc; algorithmic trading; liquidity; volatility; price discovery; arbitrage opportunities;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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