1 Forex in the Future Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey Global Asset Allocation and Stock Selection
Dec 30, 2015
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Forex in the Future
Campbell R. HarveyDuke University, Durham, NC USA
National Bureau of Economic Research, Cambridge MA USA
http://www.duke.edu/~charvey
Global Asset Allocation and Stock Selection
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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!
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Forex in the Future:-----Current landscape
Trading
Basic technology has not changed in decades
(“request for quote” method)
• Phone around to banks/investment banks and get a quotation
• Take the best price
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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
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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 %
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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!
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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
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Forex in the Future:-----New forces in the market
Two consoritia: FXall and Atriax
Advantages:
• Saves time in doing phone around
• Electronic execution
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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
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Forex in the Future:-----New forces in the market
Two consoritia: FXall and Atriax
Disadvantages:
Generally, it is a bad business idea to request a quote from a consortium – you are asking for trouble.
Overall, it is the same old market facilitated with the Internet
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Forex in the Future:-----New forces in the market
One consoritia:
Atriax goes out of business in 2002
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Forex in the Future:-----New forces in the market
Others: Currenex
Advantages:
• Independence
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Forex in the Future:-----New forces in the market
Others: Currenex
Disadvantages:
• Must take bid or ask
• Does not accommodate a limit order book (like NASDAQ trading)
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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
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Client Forexster
Bank 2
Bank 3
Bank 4
Bank 5
Bank 1Type 1 unit
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Client Forexster
Bank 2
Bank 3
Bank 4
Bank 5
Bank 1
Reverse auction
Type 1 unit
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Client 2
Client 3
Client 4
Client 5
Client 6
Client 7
Client 8
Client 9
Client 1
BankForexster
Type 2 unit
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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
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Bank
Client
Type 1
Type 2
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24
25
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Forex in the Future:-----New forces in the market
Further reading• Ben Wright, “Unlocking the C2C forex riddle”
Euromoney.com July 2001
• Jennifer Morris “Forex goes into future shock” Euromoney October 2001
• Joff Wild “Europe lags US in business-method patents” Euromoney March 2002
• Tessa Oakley “Forexster throws down client-to-client patent challenge” Euromoney March 2002