NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Did the Reform Fix the London Fix Problem?

Takatoshi Ito, Masahiro Yamada

NBER Working Paper No. 23327
Issued in April 2017
NBER Program(s):The International Finance and Macroeconomics Program

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.

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Document Object Identifier (DOI): 10.3386/w23327

Published: Takatoshi Ito & Masahiro Yamada, 2017. "Did the Reform Fix the London Fix problem?," Journal of International Money and Finance, .

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