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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
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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
TradingBasic technology has not changed in decades
• Phone around to banks/investment banks and get a quotation
• Take the best price
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Forex in the Future:-----Trading technology
TradingBasic technology has not changed in decades
• 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 11Spread 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 riskPlus, they make a pile of money!
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Forex in the Future:-----New forces in the market
Two consoritia: FXall and AtriaxSimilar 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 AtriaxAdvantages:• 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 AtriaxDisadvantages:• Does not necessarily reduce spread cost• Makes collusion among consortium partners a
possibility (current DOJ investigation)• No cross quotes between the two consortiaBasically, it is the same old market facilitated with
the Internet
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Forex in the Future:-----New forces in the market
Reverse auctionForexster.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
Dire
ct tr
adeType 2 unit
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Bank
Client
Type 1
Type 2
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Forex in the Future:-----New forces in the market
Further readingBen Wright, “Unlocking the C2C forex riddle”Euromoney on-line, July 25, 2001
