Market structure and dealers' quoting behavior in the foreign exchange market
AbstractThis article examines how differently the same dealer quotes in the inter-dealer and customer foreign exchange markets that have different market structures. The model first predicts that customer spreads are generally wider than inter-dealer ones due to less transparency in the customer market. The model also predicts that since customers are believed to be less informed than dealers, the differential between customer and inter-dealer spreads tends to fall with the rise in order sizes. In addition, the dealer's mid-quotes are shown to be the same in the two markets. Empirical evidence based on data collected from a FX dealer supports these theoretical findings.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.
Volume (Year): 18 (2008)
Issue (Month): 4 (October)
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Web page: http://www.elsevier.com/locate/intfin
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