Financial Market Microstructure

Recent Publications

Price Discovery in Two‐Tier Markets. International Journal of Finance and Economics 26(2): 3109-3133 (2021).
Joint work with Geir Bjønnes and Dagfinn Rime.
- The big, dominant FX dealing banks are better informed than small ones.

Those massive dealing banks are both a source and a conduit of private information in the FX market.

Shrouding and the FX Trades of Global Custody Banks. Forthcoming, Journal of Banking and Finance.

Joint work with Tanseli Savaser

- Forensic finance. Theory and empirical analysis are used to identify a new form of shrouding in which producers vary prices over time within a long-term client relationship. The paper also: answers questions posed by lawsuits against the major global custody banks a decade ago. Yes, those banks exploited custodial clients in setting FX bid-ask spreads. They did so by varying bid-ask spreads over time to maximize profits while hiding evidence of supra-competitive spreads. Financial gains from supra-competitive spreads were substantial.

Surveys

Market Microstructure and the Profitability of Currency Trading. Annual Review of Finance and Economics 4(1) (2012): 469-495.
- A synthesis of research on FX microstructure & carry-trade profitability

Macro Lessons from Microstructure. International Journal of Finance and Economics 11(1) (2006):55-80.
- Implications of microstructure research for exchange-rate determination

Foreign Exchange Microstructure: A Survey. In: Encyclopedia of Complexity and System Science, Robert A. Meyers, Ed. (Springer: 2009).
- Integrates mainstream microstructure with FX microstructure.

The Market Microstructure Approach to Foreign Exchange: Looking Back and Looking Forward.
Journal of International Money and Finance 38. (2013): 95-119.

Joint work with Michael King and Dagfinn Rime.
- A survey of FX microstructure. Go-to cite in the literature

The Microstructure of Currency Markets. Chapter 5 of Market Microstructure in Emerging and Developed Markets.
Kent Baker and Halil Kiymaz, Eds. (John Wiley & Sons, Inc.: 2013). Joint work with Xuhang Wang.

Exchange Market Structure, Players, and Evolution. In: Handbook of Exchange Rates, 1st ed. Ed.
James, J., Ian Marsh, Lucio Sarno (Wiley and Sons: 2012). Vol. 1: 1-25. Joint work with Dagfinn Rime and Michael King.

Behavioral Microstructure

Survival of Overconfidence in Currency Markets. Journal of Financial and Quantitative Analysis. 47(1):92-113 (2012).
Joint work with Thomas Oberlechner.
- Overconfident traders are not driven out by losses – FX dealers are overconfident (like almost everyone)
and stay that way throughout their careers

Noise Trading and Illusory Correlations in US Equity Markets. Review of Finance 17(2): 625-652 (2012).
Joint work with Jennifer Bender and David Simon.
- Some technical analysis generates imperfectly rational noise trading

Other Contributions to Microstructure

Price Discovery in Currency Markets. Journal of International Money and Finance 30(8): 1696-1718 (2011).
Joint work with Alexander Mende and Lukas Menkhoff.
- Proposes mechanism for price discovery in two-tier markets. Information comes from clients,
moves the interdealer mid-quote first, and then moves client mid-quotes.

Extreme Returns: The Case of Currencies. Journal of Banking and Finance 35: 2868-2880 (2011).
Joint work with Tanseli Savaser.
- Extreme returns or – known in option research as price jumps – and high return kurtosis can be
expected in FX given the common reliance on stop-loss orders

Liquidity Dynamics in Limit Order Markets Under Asymmetric Information. Journal of Banking and Finance 34(11): 2665-2677 (2010).
Joint work with Lukas Menkhoff and Maik Schmeling.
- Shows empirically that order-placement shifts in response to shocks are driven by informed traders.
Explains why that is rational.

Stop-Loss Orders and Price Cascades in Currency Markets. Journal of International Money and Finance 24(2): 219-241 (2005).
- Provides evidence that stop-loss and limit orders generate predictable high-frequency patterns in exchange-rate dynamics.

Currency Orders and Exchange-Rate Dynamics: An Explanation for the Success of Technical Analysis.
Journal of Finance 58(5): 1791-1819 (2003).
- Shows that patterns in the placement of stop-loss and limit orders can explain the success of support and
resistance levels in predicting high-frequency exchange-rate returns.

The Fix is In: How Banks Allegedly Rigged the US $5.3 trillion Foreign Exchange Market. The Conversation (13 November 2014).