Fixing the Fix? Assessing the Eﬀectiveness of the 4pm Fix Benchmark
98 Pages Posted: 25 Oct 2018
Date Written: October 22, 2018
We examine the design and eﬀectiveness of the 4pm Fix, the most important benchmark in FX markets, using a unique dataset of trader identiﬁed orderbook data from an inter- dealer venue. We propose and examine new measures of benchmark quality and examine changes to market liquidity and trader behaviour. Benchmark quality, measured as price eﬃciency and robustness, improves after the lengthening of the ﬁx window to 5 minutes, but comes at the cost of a signiﬁcant increase in tracking error for users of the benchmark. We also ﬁnd that quoted spreads and price impact increase following the window lengthening, with HFTs trading more aggressively during the ﬁx.
Keywords: benchmark, foreign exchange markets, 4pm fix, market microstructure, transactions-based fixing
JEL Classification: D47, G14, G15, G18, F31
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