Discriminatory Pricing of Over-The-Counter FX Derivatives

SFI Working Paper No. 17-xx
with Peter Hoffmann, Sam Langfield and Yannick Timmer

Abstract

New regulatory data reveal extensive discriminatory pricing in the FX derivatives market, in which bank dealers and non-financial clients trade over-the-counter. A corporate client at the 75th percentile of average transaction costs pays a roughly 12 times larger spread than a corporate client at the 25th percentile after controlling for contract characteristics, the dealer bank identify, and market conditions. This large difference in average execution quality strongly correlates with various proxies of client sophistication. However, client trading via electronic request for quote (RFQ) systems creates competition between dealers and eliminates discriminatory pricing irrespective of client sophistication.

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