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Global Algorithmic Capital MarketsHigh Frequency Trading, Dark Pools, and Regulatory Challenges$
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Walter Mattli

Print publication date: 2018

Print ISBN-13: 9780198829461

Published to Oxford Scholarship Online: January 2019

DOI: 10.1093/oso/9780198829461.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 20 October 2021

The FX Race to Zero

The FX Race to Zero

Electronification and Market Structural Issues in Foreign Exchange Trading

(p.61) 4 The FX Race to Zero
Global Algorithmic Capital Markets

Dan Marcus

Miles Kellerman

Oxford University Press

This chapter traces how technological changes have affected the structure and operation of currency markets, and examines the issues associated with these developments. These changes have caused significant concern within the industry and raise complicated questions about whether additional regulation is necessary. Nevertheless, they have received relatively little theoretical or empirical attention in comparison to similar developments in equities markets. To address this gap, the chapter outlines the primary market structural issues in foreign exchange markets, including potentially abusive trading techniques, last look, and perverse incentives to monetize access to speed and information. Further, the chapter provides an example of a high frequency latency arbitrage opportunity and discusses the potential mitigating impact of a randomized delay mechanism. This is followed by an analysis of recent regulatory efforts to address these issues in the UK, the EU, and the US, in addition to a review of industry-led initiatives to establish best practices for algorithmic traders and venue operators. The chapter concludes by discussing key questions and constraints for future research.

Keywords:   foreign exchange market, FX market, high frequency trading, market microstructure, financial regulation, market abuse, last look, latency arbitrage, perverse incentive

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