Seminar in International Economic Policy (KOF-ETH-UZH)

Discriminatory Pricing of Over-the-Counter FX Derivatives

Harald Hau (University of Geneva)
Discriminatory Pricing of Over-the-Counter FX Derivatives
October 12, 2017 | 12:15 - 13:30 | ETH LEE-E-101

New regulatory data reveal extensive discriminatory pricing in the FX derivatives market, in which dealers and their non-financial clients trade over-the-counter. The client at the 75th percentile of the cross-sectional distribution pays an average spread that is 17 times as large as that paid by the client at the 25th percentile. We show that spreads decline with client sophistication. Trading on electronic request-for- quote platforms induces competition among dealers, which eliminates price discrim- ination and prevents dealers from exploiting recent price changes to their advantage. We additionally quantify the effects on spreads of dealer-client relationships, coun- terparty risk, and contract customization.