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Forex in the Future

Global Asset Allocation and Stock Selection. Forex in the Future. 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

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Forex in the Future

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  1. Global Asset Allocation and Stock Selection Forex in the Future Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey

  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. 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. 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. 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. Forex in the Future:-----Trading cost Frequency in %

  7. 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!

  8. 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

  9. Forex in the Future:-----New forces in the market Two consoritia: FXall and Atriax Advantages: • Saves time in doing phone around • Electronic execution

  10. 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

  11. 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

  12. Type 1 unit Bank 1 Bank 2 Client Forexster Bank 3 Bank 4 Bank 5

  13. Type 1 unit Bank 1 Reverse auction Bank 2 Client Forexster Bank 3 Bank 4 Bank 5

  14. Type 2 unit Client 1 Client 2 Client 3 Client 4 Forexster Bank Client 5 Client 6 Client 7 Client 8 Client 9

  15. Type 2 unit Client 1 Client 2 Client 3 Client 4 Forexster Direct trade Bank Client 5 Client 6 Client 7 Client 8 Client 9

  16. Type 2 Type 1 Bank Client

  17. 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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