Forex in the Future
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Transcript of Forex in the Future
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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
TradingBasic 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
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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 consortia
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Forex in the Future:-----New forces in the market
Two consoritia: FXall and AtriaxDisadvantages: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: CurrenexAdvantages:• Independence
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Forex in the Future:-----New forces in the market
Others: CurrenexDisadvantages:• 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
Others: Currenex?London, Jan. 16, 2003 (Bloomberg) -- Currenex Inc.
Chief Executive Lori Mirek left the electronic currency-trading company, Financial News said, citing no one.
Mirek departed after at least three other executives left in recent months, the weekly financial newspaper reported on its Web site. Mirek previously worked at America Online Inc. and Netscape Communications Corp.
Rochel Velasco, a spokeswoman for Currenex, said the companyhad no immediate comment.
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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 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