Discriminatory Pricing of Over-the-Counter Derivatives
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Summary:
New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.
Series:
Working Paper No. 2019/100
Subject:
Currency markets Expenditure Financial markets Over-the-counter markets Price adjustments Prices Public investment and public-private partnerships (PPP) Securities markets
English
Publication Date:
May 7, 2019
ISBN/ISSN:
9781498303774/1018-5941
Stock No:
WPIEA2019100
Pages:
45
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