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Shrouding and the Foreign Exchange Trades of Global Custody Banks

Author

Listed:
  • Carol Osler

    (Brandeis University)

  • Tanseli Savaser

    (Vassar College)

Abstract

Custodial forex trades generally have far higher bid-ask spreads than regular OTC trades. We develop a model of custodial liquidity provision and test it using trade records from a global custody bank. Custodial dealers set high markups and “shroud” them by exploiting their clients’ limited access to information. Market opacity becomes endogenous as custodial dealers benchmark prices to the day’s high or low (as relevant) rather than the currency’s true value. A predicted kink in the relation between client price and the interbank price is evident in scatterplots and confirmed by regressions. Custodial dealers also shroud by delaying trades.

Suggested Citation

  • Carol Osler & Tanseli Savaser, 2018. "Shrouding and the Foreign Exchange Trades of Global Custody Banks," Working Papers 118, Brandeis University, Department of Economics and International Business School.
    • Handle: RePEc:brd:wpaper:118
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP118.pdf
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