The Foreign Exchange Market
The Research Handbook of Financial Markets, edited by Refet Gürkaynak and Jonathan Wright. Edward Elgar. 2022.
26 Pages Posted: 6 Apr 2022 Last revised: 19 Aug 2022
Date Written: March 21, 2022
This chapter discusses the structure and functioning of the spot foreign exchange (FX) market. The market structure, which has become far more complex over the past three decades, has mostly evolved endogenously as the global FX market is subject to notably less regulatory oversight than equity and bond markets in most countries. Major banks used to dominate liquidity provision but they have found their role challenged by High Frequency Trading firms in an increasingly fragmented electronic market. The information structure of the market has also changed. As such, high-frequency cross-asset correlations, especially with the futures market, have become more important. The chapter also discusses the important role of the official sector in the FX market, and it highlights a few special topics such as flash events and the FX fixing scandal. We conclude with some suggestions for future research.
Keywords: Financial markets, Foreign exchange, Market microstructure, Dealer intermediation, Electronic trading, Algorithmic trading
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