Dynamic Modelling of High-Frequency Trading Impacts on Liquidity and Volatility in the Forex Markets: Evidence from Tunisia and Global Markets via GARCH Models

Purpose – This study analyzes the impact of high-frequency trading on liquidity and volatility in the foreign exchange market, with a focus on Tunisia. It highlights the growing importance of HFT in global Forex markets and addresses the lack of research on its effects in emerging economies, where market structures and technology differ from developed markets. Design/Methodology/Approach – This thesis studies the link between high-frequency trading and Forex market liquidity and volatility using three months of tick data from January to April 2025 provided by the London Stock Exchange Group. It applies the Generalized Autoregressive Conditional Heteroskedasticity model to major currency pairs in developed markets and the Exponential Generalized Autoregressive Conditional Heteroskedasticity model to capture asymmetries specific to emerging markets, while also considering differences in market structure and regulation. Findings – The findings show that high-frequency trading improves liquidity in global Forex markets but can increase instability during periods of high volatility. In the Tunisian Forex market, its effects differ due to lower liquidity, limited technological infrastructure, and stricter regulatory conditions. Research Implications – The study suggests that targeted regulatory measures in Tunisia, such as minimum order resting times, transaction taxes, and volatility controls, could strengthen the positive effects of highfrequency trading on liquidity while improving market stability and reducing illiquidity risks.