Forex in the future implications for asset management
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Forex in the Future: Implications for Asset Management. Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey. Forex in the Future: -----Current landscape. Market $1.500 trillion in forex transacted every day*

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Forex in the Future: Implications for Asset Management

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Forex in the future implications for asset management

Forex in the Future: Implications for Asset Management

Campbell R. Harvey

Duke University, Durham, NC USA

National Bureau of Economic Research, Cambridge MA USA

http://www.duke.edu/~charvey


Forex in the future implications for asset management

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!


Forex in the future implications for asset management

Forex in the Future:-----Current landscape

Trading

Basic technology has not changed in decades

  • Phone around to banks/investment banks and get a quotation

  • Take the best price


Forex in the future implications for asset management

Forex in the Future:-----Trading technology

Trading

Basic technology has not changed in decades

  • Phone around to banks/investment banks and get a quotation

  • Take the best price


Forex in the future implications for asset management

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


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 100 USD

Frequency in %


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 10000 JPY (about $80)

Frequency


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 100 CAD (about $65)

Frequency


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 100 CHF (about $60)

Frequency


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 100 USD

Frequency


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 100 CHF (about $60)

Frequency


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 10000 JPY (about $80)

Frequency


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

one pip is 100 CHF (about $60)

Frequency


Forex in the future implications for asset management

Forex in the Future:-----Trading cost

Why are trading costs so high?

Banks provide:

  • Clearing

  • Credit monitoring

  • Bear inventory risk

    Plus, they make a pile of money!


Forex in the future implications for asset management

Forex in the Future:-----New forces in the market

Two consoritia: FXall and Atriax

Similar 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


Forex in the future implications for asset management

Forex in the Future:-----New forces in the market

Two consoritia: FXall and Atriax

Advantages:

  • Saves time in doing phone around

  • Electronic execution


Forex in the future implications for asset management

Forex in the Future:-----New forces in the market

Two consoritia: FXall and Atriax

Disadvantages:

  • Does not necessarily reduce spread cost

  • Makes collusion among consortium partners a possibility (current DOJ investigation)

  • No cross quotes between the two consortia

    Basically, it is the same old market facilitated with the Internet


Forex in the future implications for asset management

Forex in the Future:-----New forces in the market

Reverse auction

Forexster.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


Forex in the future implications for asset management

Type 1 unit

Bank 1

Bank 2

Client

Forexster

Bank 3

Bank 4

Bank 5


Forex in the future implications for asset management

Type 1 unit

Bank 1

Reverse auction

Bank 2

Client

Forexster

Bank 3

Bank 4

Bank 5


Forex in the future implications for asset management

Type 2 unit

Client 1

Client 2

Client 3

Client 4

Forexster

Client 5

Bank

Client 6

Client 7

Client 8

Client 9


Forex in the future implications for asset management

Type 2 unit

Client 1

Client 2

Client 3

Client 4

Forexster

Direct trade

Client 5

Bank

Client 6

Client 7

Client 8

Client 9


Forex in the future implications for asset management

Interconnected Type 1

and Type 2 units

Type 2

Bank

Client

FXLine

Direct trade

Type 1


Forex in the future implications for asset management

Forex in the Future:-----New forces in the market

Further reading

Ben Wright, “Unlocking the C2C forex riddle”

Euromoney on-line, July 25, 2001


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