High Frequency Quoting and Price Discovery in the Foreign Exchange Market

This thesis studies the process of price discovery in the FX market via three empirical chapters. In the presence of high frequency trading and its expansion in the FX market, the first empirical chapter contributes to the literature by analysing how high frequency quoting affects price discovery in the foreign exchange market. It finds that while an increase in dealers’ quotation speed is positively associated with short-term (within 1 minute) price discovery, this is not the case for longer-term (1-day) price discovery. These results cast doubt on the overall benefit of high frequency activities for long term price discovery in the foreign exchange market.
The second empirical chapter studies the impact of economist affiliation, quoting speed, and the geographical proximity on dealers’ contribution to price discovery around macroeconomic news announcements. The findings show that dealers with affiliated economists have higher contribution to price discovery and their contribution increases by increases in the research scope of their affiliated economists. The locality of dealers and economists to news sources is also found to create an information advantage for dealers.
In the presence of the manipulation of the World Markets/Reuters benchmark in the foreign exchange market, regulators need a robust and timely methodology that identifies potential manipulation in order to better direct their limited resources towards more targeted in-depth investigation. The third empirical chapter of this thesis develops a manipulation index (ManIx) which captures the potential manipulation intention of dealers during the fixing period through a unique algorithm and simulation. The application of this model is able to identify banks that are prone to potential manipulative behaviour. The results concerning the identified banks are supported by verification of these bank with disclosure of regulatory investigations. Overall, ManIx offers a decision support tool to both regulators and banks to monitor market participants for manipulative behaviour.