Price Manipulation and Collusion around the London 4pm Fix *

Abstract

Inspired by several investigations on the manipulation of the London 4pm Fix, we develop a model of price manipulation and collusion. In our model, several large dealers receive "fill-at-Fix" orders well before the time interval over which the benchmark rate is set. As long as dealers share information on their clients' hedging demand and coordinate their trading activity, they find it profitable to front-run their clients' orders. Information sharing and collusion affect price dynamics and market quality. Thus, front-running generates larger transaction costs and volatility before than during the Fix period and price manipulation intensifies when the volume of FX hedging demand increases (for example, during end-of-month days). These implications are confirmed empirically in our analysis of FX spot market, based on EBS transaction data for the EUR/USD rate.

Keywords: F31, G14, G15 FX Market Microstructure, Price Manipulation, London 4pm Fix

JEL Classification: F31, G14, G15