Spot Arbitrage in FX Market and Algorithmic Trading: Speed Is Not of the Essence
37 Pages Posted: 20 Sep 2017
Date Written: March 24, 2017
Abstract
This paper studies the properties of spot arbitrage opportunities in the interdealer foreign exchange market. We cast into question current understanding of spot FX arbitrage in the literature, specifically vis-á-vis algorithmic trading. The presence of algorithmic traders does not offer significant improvement in price discovery by quickly detecting and exploiting mispricing of currency pairs.Traders - algorithmic or otherwise - in fact mostly do not exploit spot arbitrage opportunities in the market. To the contrary, algorithmic trading facilitates the creation of arbitrage by tighter liquidity provision. This effect is blunted by microstructure frictions, resulting in decreasing number of arbitrage opportunities.
Keywords: Foreign Exchange Market, Triangular Arbitrage, Algorithmic Trading, Price Discovery, Inventory Risk
JEL Classification: F31, G10, G14
Suggested Citation: Suggested Citation
Michael Tseng (Contact Author)
Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland
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