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Foreign exchange market structure, players and evolution

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Author Info

  • Michael R. King

    ()
    (Richard Ivey School of Business, University of Western Ontario)

  • Carol Osler

    ()
    (Brandeis International Business School, Brandeis University)

  • Dagfinn Rime

    ()
    (Norges Bank (Central Bank of Norway))

Abstract

Electronic trading has transformed foreign exchange markets over the past decade, and the pace of innovation only accelerates. This formerly opaque market is now fairly transparent and transaction costs are only a fraction of their former level. Entirely new agents have joined the fray, including retail and high-frequency traders, while foreign exchange trading volumes have tripled. Market concentration among dealers has risen reflecting the heavy investments in technology. Undeterred, some new non-bank market participants have begun to make markets, challenging the traditional foreign exchange dealers on their own turf. This paper outlines the players in this market and the structure of their interactions. It also presents new evidence on how that structure has changed over the past two decades. Throughout, it highlights issues relevant to exchange rate modelling.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2011/WP-201110/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2011/10.

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Length: 45 pages
Date of creation: 14 Aug 2011
Date of revision:
Handle: RePEc:bno:worpap:2011_10

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Related research

Keywords: exchange rates; algorithmic trading; market microstructure; electronic trading; high frequency trading;

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Cited by:
  1. Mathias Hoffmann & Rahel Suter, 2013. "Systematic consumption risk in currency returns," ECON - Working Papers 124, Department of Economics - University of Zurich.
  2. Carol Osler & Thang Nguyen & Tanseli Savaser, 2011. "Asymmetric Information and the Foreign-Exchange Trades of Global Custody Banks," Department of Economics Working Papers 2011-09, Department of Economics, Williams College.
  3. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers 49, Brandeis University, Department of Economics and International Businesss School.
  4. Christian D. Dick & Lukas Menkhoff, 2013. "Exchange Rate Expectations of Chartists and Fundamentalists," CESifo Working Paper Series 4181, CESifo Group Munich.
  5. Mathias Hoffmann & Rahel Suter, 2013. "Systematic Consumption Risk in Currency Returns," CESifo Working Paper Series 4273, CESifo Group Munich.
  6. Reitz, Stefan & Schmidt, Markus A. & Taylor, Mark P., 2009. "Financial intermediation and the role of price discrimination in a two-tier market," Discussion Paper Series 1: Economic Studies 2009,13, Deutsche Bundesbank, Research Centre.
  7. Lukas Menkhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2011. "Currency Momentum Strategies," BIS Working Papers 366, Bank for International Settlements.
  8. Hans Jørgen Tranvåg & Dagfinn Rime, 2012. "The Flows of the Pacific: Asian foreign exchange markets through tranquility and turbulence," Working Paper Series 12412, Department of Economics, Norwegian University of Science and Technology.
  9. Mehdi Lallouache & Fr\'ed\'eric Abergel, 2013. "Tick Size Reduction and Price Clustering in a FX Order Book," Papers 1307.5440, arXiv.org, revised May 2014.
  10. Dietmar Janetzko, 2014. "Using Twitter to Model the EUR/USD Exchange Rate," Papers 1402.1624, arXiv.org.
  11. Filip Zikes & Jozef Barunik & Nikhil Shenai, 2012. "Modeling and Forecasting Persistent Financial Durations," Papers 1208.3087, arXiv.org, revised Apr 2013.
  12. Morten Bech, 2012. "FX volume during the financial crisis and now," BIS Quarterly Review, Bank for International Settlements, March.
  13. Lukas Mankhoff & Lucio Sarno & Maik Schmeling & Andreas Schrimpf, 2013. "Information Flows in Dark Markets: Dissecting Customer Currency Trades," BIS Working Papers 405, Bank for International Settlements.
  14. M. Frömmel & F Van Gysegem, 2014. "Bid-Ask Spread Components on the Foreign Exchange Market: Quantifying the Risk Component," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/878, Ghent University, Faculty of Economics and Business Administration.
  15. Levich, Richard M., 2012. "FX counterparty risk and trading activity in currency forward and futures markets," Review of Financial Economics, Elsevier, vol. 21(3), pages 102-110.

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