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Did the Reform Fix the London Fix Problem?

Author

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  • Takatoshi Ito
  • Masahiro Yamada

Abstract

This paper examines the consequences of the 2015 reform on the London fixing in the interbank forex market, which resulted from finding and imposing a penalty on banks’ collusive behavior around the fixing window. The banks changed their behavior after the reform, and the volume spike in the fixing window disappeared. However, the anomalies on price dynamics reported in the previous literature still exist, and banks’ passive trading strategy generates another predictability in the price movement. A theoretical model of optimal execution is used to calibrate the execution of fixing transactions by banks, and evaluate the increase in the cost and risks of fixing trades incurred by the banks' behavior. This paper is the first to examine the efficiency of banks’ behavior after the reform. The volume pattern during the fixing time window suggests that banks, by avoiding (even the appearance of) collusion, now incur the costs of executing customers’ orders.

Suggested Citation

  • Takatoshi Ito & Masahiro Yamada, 2017. "Did the Reform Fix the London Fix Problem?," NBER Working Papers 23327, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23327
    Note: IFM
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    Cited by:

    1. Ibikunle, Gbenga & Mollica, Vito & Sun, Qiao, 2024. "Detecting anomalous WM/reuters fixes using Trailing Contextual Anomaly Detection," International Review of Economics & Finance, Elsevier, vol. 96(PA).
    2. Melvin, Michael & Pan, Wenqiang & Wikstrom, Petra, 2020. "Retaining alpha: The effect of trade size and rebalancing frequency on FX strategy returns," Journal of Financial Markets, Elsevier, vol. 51(C).
    3. Marjolein E. Verhulst & Philippe Debie & Stephan Hageboeck & Joost M. E. Pennings & Cornelis Gardebroek & Axel Naumann & Paul van Leeuwen & Andres A. Trujillo‐Barrera & Lorenzo Moneta, 2021. "When two worlds collide: Using particle physics tools to visualize the limit order book," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1715-1734, November.
    4. Nuria Boot & Timo Klein & Maarten Pieter Schinkel, 2017. "Collusive Benchmark Rates Fixing," Tinbergen Institute Discussion Papers 17-122/VII, Tinbergen Institute, revised 17 Apr 2019.
    5. Nuria Boot & Timo Klein & Maarten Pieter Schinkel, 2017. "Collusive Benchmark Rates Fixing," Discussion Papers of DIW Berlin 1715, DIW Berlin, German Institute for Economic Research.
    6. Benenchia, Matteo & Galati, Luca & Lepone, Andrew, 2024. "To fix or not to fix: The representativeness of the WM/R methodology that underpins the FX benchmark rates. A pre-registered report," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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