IDEAS home Printed from https://ideas.repec.org/p/boj/bojrev/rev20e05.html
   My bibliography  Save this paper

An Overview of Algorithmic Trading in Foreign Exchange Markets and Its Impacts on Market Liquidity

Author

Listed:
  • FUKUMA Noritaka

    (Bank of Japan)

  • KADOGAWA Yoichi

    (Bank of Japan)

Abstract

In recent years, the foreign exchange market has seen a growing presence of algorithmic trading, that is, a process of automated transactions based on pre-determined programs. Concurrently, the need to better understand its characteristics has become more important. In this paper, we construct proxy indicators of algorithmic trading in the USD/JPY spot market by focusing on its general features - high-speed and high-frequency transactions. Based on the proxy indicators, algorithmic trading has been on an upward trend since around 2016 and is more active in European and U.S. time zones than in Japan. Our analysis shows that algorithmic trading on average helps improve market liquidity in normal times. Its liquidity-providing function was generally maintained under market stress triggered by the COVID-19 pandemic from late-February to end-March 2020, though it could have been dampened albeit temporarily in times of severe stress when the market experienced sudden and sharp price fluctuation.

Suggested Citation

  • FUKUMA Noritaka & KADOGAWA Yoichi, 2020. "An Overview of Algorithmic Trading in Foreign Exchange Markets and Its Impacts on Market Liquidity," Bank of Japan Review Series 20-E-5, Bank of Japan.
    • Handle: RePEc:boj:bojrev:rev20e05
    as

    Download full text from publisher

    File URL: https://www.boj.or.jp/en/research/wps_rev/rev_2020/data/rev20e05.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Foreign exchange; Algorithmic trading; Market liquidity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boj:bojrev:rev20e05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bank of Japan (email available below). General contact details of provider: https://edirc.repec.org/data/bojgvjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.