Discriminatory Pricing of Over-the-Counter Derivatives

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.
Publication date: May 2019
ISBN: 9781498303774
$18.00
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Topics covered in this book

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Transaction costs , search frictions , information rents , RFQ platforms , RFQ , mid-price , counterparties , price adjustment , price discrimination

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