1 Forex in the Future: Implications for Cash Management Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey Association of Financial Planners February 12, 2002
1 Forex in the Future: Implications for Cash Management Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge.
Jan 20, 2016
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1
Forex in the Future: Implications for Cash Management
Campbell R. HarveyDuke University, Durham, NC USA
National Bureau of Economic Research, Cambridge MA USA
http://www.duke.edu/~charvey
Association of Financial PlannersFebruary 12, 2002
2
Forex in the Future:-----Current landscape
Market
$1.500 trillion in forex transacted every day*
$0.020 trillion stocks transacted on NYSE
*Does not include forwards, swaps, and options!
3
Forex in the Future:-----Current landscape
Trading
Basic technology has not changed in decades
• Phone around to banks/investment banks and get a quotation
• Take the best price
4
Forex in the Future:-----Trading technology
Trading
Basic technology has not changed in decades
• Phone around to banks/investment banks and get a quotation
• Take the best price
5
Forex in the Future:-----Trading cost
Components
• Clearing fee (say on 1 million €) $9-25
• Bid-ask spread largest component– 90% of the time 2-5 pips ($200-500)– median is 5 pips
6
Forex in the Future:-----Trading cost
05
101520253035404550
0 1 2 3 4 5 6 7 8 9 10 11
Spread in pips for EUR-USD
Frequency in %
7
Forex in the Future:-----Trading cost
Why are trading costs so high?
Banks provide:
• Clearing
• Credit monitoring
• Bear inventory risk
Plus, they make a pile of money!
8
Forex in the Future:-----New forces in the market
Two consoritia: FXall and Atriax
Similar product, different partners
• Using the Internet, press a button and get the best two way quote (bid-ask) from consortia members
• FXall has been around one year
• Atriax launched in July 2001
9
Forex in the Future:-----New forces in the market
Two consoritia: FXall and Atriax
Advantages:
• Saves time in doing phone around
• Electronic execution
10
Forex in the Future:-----New forces in the market
Two consoritia: FXall and Atriax
Disadvantages:
• Does not necessarily reduce spread cost
• Makes collusion among consortium partners a possibility (current DOJ investigation)
• No cross quotes between the two consortia
Basically, it is the same old market facilitated with the Internet
11
Forex in the Future:-----New forces in the market
Reverse auction
Forexster.com
• Applied for several patents for a reverse auction type of system for FX trading
• Two types of systems– Type 1 client communicating to many banks– Type 2 many clients communicating with bank
12
Client Forexster
Bank 2
Bank 3
Bank 4
Bank 5
Bank 1Type 1 unit
13
Client Forexster
Bank 2
Bank 3
Bank 4
Bank 5
Bank 1
Reverse auction
Type 1 unit
14
Client 2
Client 3
Client 4
Client 5
Client 6
Client 7
Client 8
Client 9
Client 1
BankForexster
Type 2 unit
15
Client 2
Client 3
Client 4
Client 5
Client 6
Client 7
Client 8
Client 9
Client 1
BankForexster
Dir
ect t
rade
Type 2 unit
16
Bank
Client
Type 1
Type 2
17
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19
20
21
22
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Forex in the Future:-----New forces in the market
Further reading
Ben Wright, “Unlocking the C2C forex riddle”
Euromoney on-line, July 25, 2001
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