Judgement Day: Algorithmic Trading Around the Swiss Franc Cap Removal

Abstract

A key issue raised by the rapid growth of computerised algorithmic trading is how it responds in extreme situations. Using data on foreign exchange orders and transactions that includes identification of algorithmic trading, we find that this type of trading contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015, which was an event that came as a complete surprise to market participants. In particular, we find that algorithmic traders withdrew liquidity and generated uninformative volatility in Swiss franc currency pairs, while human traders did the opposite. However, we find no evidence that algorithmic trading propagated these adverse effects on market quality to other currency pairs.

Information Revelation in Decentralized Markets

“…The euro crashed against the franc in the minutes thereafter, one of the most salient crashes in recent history (Breedon et al. ()).…”

“…Initial submission: July 24, 2017; Accepted: November 9, 2018 Editors: Stefan Nagel, Philip Bond, Amit Seru, and Wei Xiong Appendix A: The EUR/CHF Crash In this appendix, we present descriptive statistics on quoting activity, prices, and bid-ask spreads, as well as information share estimates, for the EUR/CHF crash on January 15, 2015. For an in-depth analysis of human and algorithmic trading activity at EBS on the day of the crash, see Breedon et al (2018).…”

“…Breedon et al. () find little footprint of SNB interventions around the depegging event and thus we believe that any effect of such interventions during normal times is likely to be small as well (see the Appendix).…”

“…Given its central role in the event, it is likely that trading by SNB left a strong footprint in the data in the aftermath of the crash. However, investigation of the EUR/CHF crash by Breedon et al (2018) shows that the empirical patterns are robust to removing (an estimate of) SNB trading that day. We therefore expect the effect of SNB trading to be small in our sample as well, but unfortunately we do not have proxies for SNB trading to verify our conjecture.…”

“…However, the sample also includes the day of this removal, when at 10:30 AM local time the Swiss central bank made the surprise announcement. The euro crashed against the franc in the minutes thereafter, one of the most salient crashes in recent history (Breedon et al (2018)).…”