Spot Arbitrage in FX Market and Algorithmic Trading: Speed is Not of the Essence

41 Pages Posted: 20 Sep 2017 Last revised: 27 Oct 2020

See all articles by Soheil Mahmoodzadeh

Soheil Mahmoodzadeh

University of Cambridge - Faculty of Economics

Michael Tseng

University of Central Florida

Date Written: March 25, 2019

Abstract

We examine the role of algorithmic traders as arbitrageurs and their impact on price efficiency in the
interdealer foreign exchange market. Algorithmic traders do not improve price efficiency by detecting and exploiting mis-priced currency pairs. To the contrary, algorithmic traders contribute to the creation of arbitrage opportunities as a byproduct of intensified competition among liquidity providers. On the other hand, their market making activity also amplifies microstructure barriers to the creation of arbitrage opportunities, which explains the reduced occurrence of arbitrage opportunities.

Keywords: Foreign Exchange Market, Triangular Arbitrage, Algorithmic Trading, Price Discovery, Inventory Risk

JEL Classification: F31, G10, G14

Suggested Citation

Mahmoodzadeh, Soheil and Tseng, Michael, Spot Arbitrage in FX Market and Algorithmic Trading: Speed is Not of the Essence (March 25, 2019). Available at SSRN: https://ssrn.com/abstract=3039407 or http://dx.doi.org/10.2139/ssrn.3039407

Soheil Mahmoodzadeh

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Michael Tseng (Contact Author)

University of Central Florida ( email )

4000 Central Florida Blvd
Orlando, FL 32816-1400
United States

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