Effects of High-Frequency Trading in the Multidealer Spot Foreign Exchange

Abstract

Contributions of various trading styles to the liquidity of the multidealer foreign exchange (FX) spot market are described. Market impact of the intervention of the Bank of Japan in 2011 is discussed. Particular attention is given to the effects of high-frequency trading (HFT). It is argued that the HFT orders occupy the top of the limit order book most of the time and, as a result, HFT determines the market volatility. Possible solutions to maintaining market liquidity in the presence of HFT are addressed.