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Did the Reform Fix the London Fix Problem?

Takatoshi Ito () and Masahiro Yamada

No 23327, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D43 D47 F30 F31 F33 G12 G15 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-mst
Note: IFM
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Published as Takatoshi Ito & Masahiro Yamada, 2017. "Did the Reform Fix the London Fix problem?," Journal of International Money and Finance, .

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