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FCA publish Occasional Paper 63: HFTs and dealer banks: liquidity and price discovery in FX trading


On 20 January 2023, the FCA published an Occasional Paper on HFTs and dealer banks: liquidity and price discovery in FX trading.

In this Occasional Paper, the FCA characterises the liquidity provision and price discovery roles of dealers and high frequency traders (HFTs) in the FX spot market during the sample period between 2012 and 2015.

The Occasional Paper highlights the following findings:

  • HFT liquidity provision is less sensitive to spikes in market-wide volatility, while dealer bank liquidity is more robust ahead of scheduled macro-economic news announcements when adverse selection risk is high.
  • In normal times, HFTs contribute to market liquidity by passively trading against the pricing errors created by dealers’ aggressive trade flows.
  • On price discovery, HFTs contribute the dominant share, mostly through their high-frequency quote updates, which incorporate public information. In contrast, dealers contribute to price discovery more through trades that impound private information.


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