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Judgement Day: algorithmic trading around the Swiss franc cap removal

Author

Listed:
  • 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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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Swiss franc; algorithmic trading; liquidity; volatility; price discovery; arbitrage opportunities;

    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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