HFTs and dealer banks: Liquidity and price discovery in FX trading

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Speaker: Wenqian Huang, Bank for International Settlements

This paper examines the complementary roles of dealer banks and high-frequency traders (HFTs) in foreign exchange markets. Using unique data from dealer-to-client (D2C) and dealer-to-dealer (D2D) segments, we find that dealers retain an informational advantage, while HFTs mitigate adverse selection by leveraging speed and technology. Dealers drive price discovery through informed trades, whereas HFTs enhance it via rapid quote adjustments. HFTs provide stable liquidity during market-wide volatility spikes, while dealers sustain liquidity before macroeconomic announcements. Our findings highlight how dealers and HFTs contribute to the quality and resilience of OTC markets.

Wenqian Huang is a Senior Economist at the Bank for International Settlements. Her research focuses on financial market infrastructures, systemic risk and financial innovation. Her work has been published in leading academic journals, including the Journal of Financial Economics and Management Science and has been featured in major media outlets such as the Financial Times and Bloomberg. 

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