The Research On The Market Maker System Of China's Foreign Exchange Market

The market microstructure theory, which is undergoing a fast development, is one of the emerging branches of finance. It has penetrated into various fields in finance and enhanced the understanding of the financial market micro-operation in theories. The foreign exchange market microstructure theory is the concrete application of the microstructure theory in foreign exchange market. A great deal of research has manifested that market microstructure is directly relevant to the realization of the security markets'function and the promotion of the market operation quality. It also has a profound impact on the liquidity, volatility, transaction cost, etc.The interbank foreign exchange market in China used the stock exchange model in the past, and the trading system is the auction system used for electronic transactions, which has lasted more than 10 years. January 4, 2006, the interbank foreign exchange market introduced market maker trading system officially. Implementation of market maker system, the original model of the transactions in the interbank foreign exchange market has not fundamentally changed, which just have a function to make market. The trading systems of the foreign exchange market at the same time have the order-driven under centralized auction system and the quote-driven under market maker system two characteristics. Now, the market maker system has been implemented for more than two years, the market has accumulated some experience in practice, providing a very valuable case for research.Then, from theoretical point of view,what is the function and effect the market maker system bring to foreign exchange market? In China's practice,what is the impact of market maker system to the liquidity,effectiveness,etc?And what is the impact to the RMB exchange rate formation mechanism? Is the market maker system, as an international trading system, the right development orientation? The answer to those problems undoubtedly has a strong practical significance.Based on the questions above,this dissertation had done a systemic research, which is extended from general to special,from abstract to specific,on the market maker system with the study on market maker system as a main line. This paper is divided into five chapters.Chapter 1 is the introduction, which introduce the main paper from the structure and theory. Chapter 2 is the theoretical basis and system analysis. It contrasts the two most important trading systems in foreign exchange market: the market maker system and the auction system. The next it focus on the impact of the market maker system for the microscopic behavior in interbank foreign exchange market, mainly from market liquidity and market efficiency aspects. Chapter 3 introduces the domestic and international trading system in the foreign exchange market. First, it introduces the characteristics on the mature international foreign exchange market. And then it studies the system reform on China's foreign exchange market since 1994, particularly the reform since 2005. Chapter 4 focuses on the application of the practice since the market maker system was used in the interbank foreign exchange market. This chapter analyses the functions and effects of the market maker system in China's interbank foreign exchange market. First it takes on the link between the market maker system and the RMB exchange rate formation mechanism, then it shows that market maker system is playing an important role in China's foreign exchange market, from the liquidity,market efficiency and the central bank's intervention three areas. The final chapter is a policy proposal, and the lack of research and development direction in future.The basic conclusions of this dissertation are as follows. Compared with the dominant auction mechanism of interbank foreign exchange market in past,the market maker system promotes the liquidity of market, enhances the market's ability to handle large transactions and promotes the efficiency from lowing the transaction time and cost (Mainly the hidden costs). The RMB exchange rate turns flexible in response to price changes in market transaction information. As the same time, the market maker system has improved market liquidity and market efficiency. Overall, the market maker system should be the orientation for further development and optimization of our interbank foreign exchange market.