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FX Spreads and Dealer Competition across the 24-Hour Trading Day

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  • Huang, Roger D
  • Masulis, Ronald W

Abstract

This study examines the impact of competition on bid-ask spreads in the spot foreign exchange market. We measure competition primarily by the number of dealers active in the market and find that bid-ask spreads decrease with an increase in competition, even after controlling for the effects of volatility. The expected level of competition is time varying, highly predictable, and displays a strong seasonal component that in part is induced by geographic concentration of business activity over the 24-hour trading day. Our estimates show that the expected addition of one more competing dealer lowers the average quoted spread by 1.7%. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 12 (1999)
Issue (Month): 1 ()
Pages: 61-93

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Handle: RePEc:oup:rfinst:v:12:y:1999:i:1:p:61-93

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Cited by:
  1. Pasquariello, Paolo, 2010. "Central bank intervention and the intraday process of price formation in the currency markets," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1045-1061, October.
  2. Hogan, Warren P. & Batten, Jonathan A., 2005. "Informed and uninformed trading on the Australian dollar," International Review of Financial Analysis, Elsevier, vol. 14(1), pages 61-75.
  3. de Jong, F. & Mahieu, R. & Schotman, P. & Leeuwen, I., 1999. "Price Discovery on Foreign Exchange Markets with Differentially Informed Traders," Papers 99-56, Southern California - School of Business Administration.
  4. Poskitt, Russell, 2006. "Swap pricing: Evidence from the sterling swap market," Global Finance Journal, Elsevier, vol. 17(2), pages 294-308, December.
  5. Angelidis, Timotheos & Andrikopoulos, Andreas, 2010. "Idiosyncratic risk, returns and liquidity in the London Stock Exchange: A spillover approach," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 214-221, June.
  6. Burkart Mönch, 2009. "Liquidating large security positions strategically: a pragmatic and empirical approach," Financial Markets and Portfolio Management, Springer, vol. 23(2), pages 157-186, June.
  7. C. H. Furfine, 1999. "The pricing of bank lending and borrowing: evidence from the federal funds market," BIS Working Papers 62, Bank for International Settlements.
  8. Fehle, Frank & Tsyplakov, Sergey, 2005. "Dynamic risk management: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 78(1), pages 3-47, October.
  9. Ding, Liang & Hiltrop, Jonas, 2010. "The electronic trading systems and bid-ask spreads in the foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 323-345, October.
  10. Tarun Ramadorai, 2008. "What determines transaction costs in foreign exchange markets?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 14-25.
  11. Liang Ding, 2009. "Bid-ask spread and order size in the foreign exchange market: an empirical investigation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 98-105.
  12. Ramadorai, Tarun, 2006. "Persistence, Performance and Prices in Foreign Exchange Markets," CEPR Discussion Papers 5861, C.E.P.R. Discussion Papers.
  13. Ding, Liang, 2008. "Market structure and dealers' quoting behavior in the foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 313-325, October.
  14. de Jong, Frank & Mahieu, Ronald J & Schotman, Peter C, 1999. "Price Discovery on Foreign Exchange Markets," CEPR Discussion Papers 2296, C.E.P.R. Discussion Papers.
  15. Ulibarri, Carlos A. & Anselmo, Peter C. & Trabatti, Mauro X., 2005. "Cournot model of brokered FX trading," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(5), pages 425-436, December.
  16. Kate Phylaktis & Long Chen, 2010. "Asymmetric information, price discovery and macroeconomic announcements in FX market: do top trading banks know more?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 228-246.
  17. Tiffany Hutcheson, 2000. "Trading in the Australian Foreign Exchange Market," Working Paper Series 107, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  18. Furfine, Craig H, 2001. "Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Market," The Journal of Business, University of Chicago Press, vol. 74(1), pages 33-57, January.
  19. Bondarenko, Oleg, 2001. "Competing market makers, liquidity provision, and bid-ask spreads," Journal of Financial Markets, Elsevier, vol. 4(3), pages 269-308, June.
  20. Taylor, Nicholas, 2002. "The economic and statistical significance of spread forecasts: Evidence from the London Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 26(4), pages 795-818, April.
  21. Törbjörn I. Becker & Amadou N. R. Sy, 2005. "Were Bid-Ask Spreads in the Foreign Exchange Market Excessive During the Asian Crisis?," IMF Working Papers 05/34, International Monetary Fund.

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