Stealth Trading in FX Markets

Alexis Stenfors and Masayuki Susai
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Masayuki Susai: Nagasaki University

No 2021-02, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: We investigate if and how other traders react to algorithmic order-splitting tactics. Studying over 1.4 million limit orders in the EUR/USD foreign exchange (FX) spot market, we find that stealth-trading strategies adopted by algorithmic traders seem to go detected and are perceived as more market-moving than orders of the corresponding size typically submitted by human traders. We also document that algorithmic traders appear to be more sensitive to limit orders submitted from the opposite side (free-option risk) than to the same side of the order book (non-execution risk). Once human traders have had time to react, however, the pattern reverses.

Keywords: algorithmic trading; foreign exchange; limit order book; market microstructure; order splitting; stealth trading (search for similar items in EconPapers)
JEL-codes: D4 F3 (search for similar items in EconPapers)
Pages: 27
Date: 2021-02-12
New Economics Papers: this item is included in nep-cwa, nep-fmk and nep-mst
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