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Discriminatory Pricing of Over-The-Counter Derivatives

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  • Hau, Harald
  • Hoffmann, Peter
  • Langfield, Sam
  • Timmer, Yannick

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

  • Hau, Harald & Hoffmann, Peter & Langfield, Sam & Timmer, Yannick, 2017. "Discriminatory Pricing of Over-The-Counter Derivatives," CEPR Discussion Papers 12525, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12525
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    Cited by:

    1. de Roure, Calebe & Mönch, Emanuel & Pelizzon, Loriana & Schneider, Michael, 2019. "OTC discount," Discussion Papers 42/2019, Deutsche Bundesbank.
    2. Cenedese, Gino & Ranaldo, Angelo & Vasios, Michalis, 2020. "OTC premia," Journal of Financial Economics, Elsevier, vol. 136(1), pages 86-105.
    3. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    4. Daniel Neuhann & Michael Sockin, 2019. "Risk-Sharing and Investment in Concentrated Markets," 2019 Meeting Papers 118, Society for Economic Dynamics.
    5. Dalla Fontana, Silvia & Holz auf der Heide, Marco & Pelizzon, Loriana & Scheicher, Martin, 2019. "The anatomy of the euro area interest rate swap market," Working Paper Series 2242, European Central Bank.
    6. Delis, Manthos & Politsidis, Panagiotis & Sarno, Lucio, 2018. "Foreign currency lending," MPRA Paper 88197, University Library of Munich, Germany.
    7. Abbassi, Puriya & Bräuning, Falk, 2018. "The pricing of FX forward contracts: Micro evidence from banks' dollar hedging," Discussion Papers 42/2018, Deutsche Bundesbank.
    8. Fiedor, Paweł & Killeen, Neill, 2019. "Securisation special purpose entities, bank sponsors and derivatives," ESRB Working Paper Series 99, European Systemic Risk Board.
    9. Andreas Schrimpf & Vladyslav Sushko, 2019. "FX trade execution: complex and highly fragmented," BIS Quarterly Review, Bank for International Settlements, December.
    10. Opie, Wei & Riddiough, Steven J., 2020. "Global currency hedging with common risk factors," Journal of Financial Economics, Elsevier, vol. 136(3), pages 780-805.
    11. Iman van Lelyveld & Sinziana Kroon, 2018. "Counterparty credit risk and the effectiveness of banking regulation," DNB Working Papers 599, Netherlands Central Bank, Research Department.

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    More about this item

    Keywords

    corporate hedging; Dealer spreads; information rents; RFQ platforms;
    All these keywords.

    JEL classification:

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

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