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Dealer Trading at the Fix

Carol Osler () and Alasdair Turnbull ()
Additional contact information
Carol Osler: Brandeis University
Alasdair Turnbull: Clarkson University

No 101R, Working Papers from Brandeis University, Department of Economics and International Businesss School

Abstract: This paper develops a model of dealer conduct – and misconduct – at the London 4 pm fix, a major currency market benchmark. The analysis clarifies the dealers’ incentives and strategies, helps explain why fix volatility remains high despite reforms, and provides insights relevant to benchmark design. Fix prices will be unusually volatile without collusion. Collusion is profitable because it shuts down a form of free-riding in which dealers front-run each other. The price trend accelerates more as the fix approaches under collusion than under independent trading. Statistical tests detect this shift around 2008, when major banks admit their dealers began colluding.

New Economics Papers: this item is included in nep-mst
Date: 2016-03, Revised 2017-06
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