Economics at your fingertips  

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

Noritaka Fukuma and Yoichi Kadogawa
Additional contact information
Noritaka Fukuma: Bank of Japan
Yoichi Kadogawa: Bank of Japan

No 20-E-5, Bank of Japan Review Series from 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.

Keywords: Foreign exchange; Algorithmic trading; Market liquidity (search for similar items in EconPapers)
JEL-codes: F31 G10 G14 (search for similar items in EconPapers)
Date: 2020-08-03
New Economics Papers: this item is included in nep-mst
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Bank of Japan Review Series from Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Bank of Japan ().

Page updated 2023-02-07
Handle: RePEc:boj:bojrev:rev20e05