Trading Strategies and Information Flow Around Price Benchmarks

27 Pages Posted: 20 May 2019

See all articles by Jo Saakvitne

Jo Saakvitne

BI Norwegian Business School

Date Written: July 26, 2018

Abstract

This paper characterize equilibrium pricing and trading strategies in a competitive market where a subset of liquidity traders have a preference for executing their trades at a benchmark price. In the model, order flow is at a maximum while price impact is at a minimum when the price benchmark is set. These results are consistent with recent empirical evidence from foreign exchange markets.

The market structure in the model give incentives for the use of manipulative frontrunning strategies, but I show that the presence of a rational market maker partly negates the use of such strategies.This has important implications for benchmark design and understanding benchmark manipulation.

Keywords: Benchmarks, price impact, trading strategies, equilibrium

JEL Classification: G14, G12

Suggested Citation

Saakvitne, Jo, Trading Strategies and Information Flow Around Price Benchmarks (July 26, 2018). Available at SSRN: https://ssrn.com/abstract=3375564 or http://dx.doi.org/10.2139/ssrn.3375564

Jo Saakvitne (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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