Fixing the Fix? Assessing the Effectiveness of the 4pm Fix Benchmark

Microstructure of Foreign Exchange Markets

“…In response to these findings, The Financial Stability Board (an international body that monitors and makes recommendations about the global financial system) recommended reforms to the WMR Fix methodology, which led to a widening of the calculation window from one to five minutes in February 2015. In a recent study, Evans et al (2018) find that this reform made the WMR Fix less susceptible to manipulation but also harder to replicate via actual trades within the window.…”

“…Undoubtedly, the fragmentation of trading in the modern FX market makes this aggregation process more complex. However, recent evidence in Evans (2018), covering the EBS platform until 2015, confirms that order flow continues to account for a very high share, more than 90 percent, of FX price variation. Furthermore, by the end of daily trading, FX prices must still induce end-users to absorb dealer-banks' net intraday positions, just as in the 1980s.…”

“…Researchers in FX microstructure have unique expertise that should inform whether and how such multilateral regulation of the FX market evolves. The recent work on the reformed WMR Fix by Evans et al (2018) represents a contribution in this direction, but in our view, there is much more that can be done.…”

Jumps in foreign exchange spot rates and the informational efficiency of currency forwards

“…A fix rate is determined by transactions within a 5-min fixing window (e.g., 15:57:30-16:02:30) around the end of a 30-min interval (e.g., 15:30:00-16:00:00). Evans et al (2018) document that the fix rates are representative of the movements of the spot rate.…”

Foreign Exchange Fixings and Returns Around the Clock

“…As we highlight the importance of the fixes for the return patterns, our paper is also related to a literature in market microstructure studying foreign exchange benchmarks. For the London fix, Evans (2018) assesses price dynamics in tight windows around the fix in the context of collusion as suggested by the fixing scandal, while Evans, O'Neill, Rime, and Saakvitne (2018) show differences in trading behavior across investor types. Unlike these papers, we consider much longer windows around the fixes and highlight the unconditional gradual appreciation and subsequent depreciation of the U.S. dollar.…”