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Discriminatory Pricing of Over-the-Counter Derivatives

Author

Listed:
  • Harald Hau

    (University of Geneva, Swiss Finance Institute, Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute))

  • Peter Hoffmann

    (European Central Bank (ECB)

  • Sam Langfield

    (European Central Bank)

  • Yannick Timmer

    (Trinity College (Dublin))

Abstract

New regulatory data reveal extensive discriminatory pricing in the foreign exchange derivatives market, in which dealer-banks and their non-financial clients trade over-the-counter. After controlling for contract characteristics, dealer fixed effects, and market conditions, we find that the client at the 75th percentile of the spread distribution pays an average of 30 pips over the market mid-price, compared to competitive spreads of less than 2.5 pips paid by the bottom 25% of clients. Higher spreads are paid by less sophisticated clients. However, trades on multi-dealer request-for-quote platforms exhibit competitive spreads regardless of client sophistication, thereby eliminating discriminatory pricing.

Suggested Citation

  • Harald Hau & Peter Hoffmann & Sam Langfield & Yannick Timmer, 2017. "Discriminatory Pricing of Over-the-Counter Derivatives," Swiss Finance Institute Research Paper Series 17-70, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1770
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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