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Discriminatory Pricing of Over-the-Counter Derivatives

Author

Listed:
  • Harald Hau
  • Peter Hoffmann
  • Sam Langfield
  • Mr. Yannick Timmer

Abstract

New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.

Suggested Citation

  • Harald Hau & Peter Hoffmann & Sam Langfield & Mr. Yannick Timmer, 2019. "Discriminatory Pricing of Over-the-Counter Derivatives," IMF Working Papers 2019/100, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/100
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    References listed on IDEAS

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    More about this item

    Keywords

    WP; client sophistication; forward rate; dealer-client relationship; FX market; market structure; Transaction costs; search frictions; information rents; RFQ platforms; sophisticated client; RFQ platform; client order; relationship dealer; information rent; Over-the-counter markets; Public investment and public-private partnerships (PPP); Currency markets; Price adjustments; Securities markets; Global;
    All these keywords.

    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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