The document discusses the current foreign exchange market landscape and forces that may impact its future. It notes that the daily forex market volume is $1.5 trillion compared to $0.02 trillion for stocks, but that basic trading technology has not changed in decades. While trading costs like bid-ask spreads are currently the largest cost component, new internet-based consortiums like FXall and Atriax may help reduce costs by streamlining the quotation process, though they do not necessarily reduce spreads and could enable collusion. Another startup called Forexster is exploring a reverse auction model for forex trading.
1. 1
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
2. 2
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!
3. 3
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
4. 4
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
5. 5
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
6. 6
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for EUR-USD
Frequency in % one pip is 100 USD
7. 7
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
35%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for USD-JPY
Frequency one pip is 10000 JPY (about $80)
8. 8
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for USD-CAD
Frequency one pip is 100 CAD (about $65)
9. 9
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for USD-CHF
Frequency one pip is 100 CHF (about $60)
10. 10
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for GBP-USD
Frequency one pip is 100 USD
11. 11
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for USD-CHF
Frequency one pip is 100 CHF (about $60)
12. 12
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
35%
40%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for EUR-JPY
Frequency one pip is 10000 JPY (about $80)
13. 13
Forex in the Future:
-----Trading cost
0%
5%
10%
15%
20%
25%
30%
35%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Spread in pips for EUR-CHF
Frequency one pip is 100 CHF (about $60)
14. 14
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!
15. 15
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
16. 16
Forex in the Future:
-----New forces in the market
Two consoritia: FXall and Atriax
Advantages:
• Saves time in doing phone around
• Electronic execution
17. 17
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
18. 18
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
31. 31
Forex in the Future:
-----New forces in the market
Further reading
Ben Wright, “Unlocking the C2C forex riddle”
Euromoney on-line, July 25, 2001
