Judgement Day: Algorithmic Trading Around the Swiss Franc Cap Removal

30 Pages Posted: 21 Feb 2018

See all articles by Francis Breedon

Francis Breedon

University of London, Queen Mary - School of Economics and Finance

Louisa Chen

University of Sussex

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

Nicholas Vause

Bank of England

Date Written: February 16, 2018

Abstract

A key issue raised by the rapid growth of computerised algorithmic trading is how it responds in extreme situations. Using data on foreign exchange orders and transactions that includes identification of algorithmic trading, we find that this type of trading contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015, which was an event that came as a complete surprise to market participants. In particular, we find that algorithmic traders withdrew liquidity and generated uninformative volatility in Swiss franc currency pairs, while human traders did the opposite. However, we find no evidence that algorithmic trading propagated these adverse effects on market quality to other currency pairs.

Keywords: Swiss franc, algorithmic trading, liquidity, volatility, price discovery, arbitrage opportunities

JEL Classification: G14, G23

Suggested Citation

Breedon, Francis and Chen, Louisa and Ranaldo, Angelo and Vause, Nicholas, Judgement Day: Algorithmic Trading Around the Swiss Franc Cap Removal (February 16, 2018). Bank of England Working Paper No. 711. Available at SSRN: https://ssrn.com/abstract=3126136 or http://dx.doi.org/10.2139/ssrn.3126136

Francis Breedon (Contact Author)

University of London, Queen Mary - School of Economics and Finance ( email )

Mile End Road
London, E1 4NS
United Kingdom

Louisa Chen

University of Sussex ( email )

Falmer, Brighton BN1 9SL
United Kingdom

Angelo Ranaldo

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Nicholas Vause

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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