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Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market

Author

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  • Barry Eichengreen
  • Romain Lafarguette
  • Arnaud Mehl

Abstract

We analyze the impact of technology on production and trade in services, focusing on the foreign exchange market. We identify exogenous technological changes by the connection of countries to submarine fiber-optic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. We estimate the impact of cable connections on the share of offshore foreign exchange transactions. Cable connections between local markets and matching servers in the major financial centers lower the fixed costs of trading currencies and increase the share of currency trades occurring onshore. At the same time, however, they attenuate the effect of standard spatial frictions such as distance, local market liquidity, and restrictive regulations that otherwise prevent transactions from moving to the major financial centers. Our estimates suggest that the second effect dominates. Technology dampens the impact of spatial frictions by up to 80 percent and increases, in net terms, the share of offshore trading by 21 percentage points. Technology also has economically important implications for the distribution of foreign exchange transactions across financial centers, boosting the share in global turnover of London, the world’s largest trading venue, by as much as one-third.

Suggested Citation

  • Barry Eichengreen & Romain Lafarguette & Arnaud Mehl, 2016. "Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market," NBER Working Papers 21884, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21884
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    Cited by:

    1. Yin-Wong Cheun & Robert N McCauley, 2019. "Geographic spread of currency trading: the renminbi and other EM currencies," BIS Working Papers 806, Bank for International Settlements.
    2. Lopez Cordova,Jose Ernesto, 2020. "Digital Platforms and the Demand for International Tourism Services," Policy Research Working Paper Series 9147, The World Bank.
    3. Andreas Schrimpf & Vladyslav Sushko, 2019. "Sizing up global foreign exchange markets," BIS Quarterly Review, Bank for International Settlements, December.
    4. Sam Haltenhof, "undated". "Services Trade and Internet Connectivity," Working Papers 668, Research Seminar in International Economics, University of Michigan.
    5. Yin-Wong Cheung & Louisa Grimm & Frank Westermann, 2020. "The Evolution of Offshore Renminbi Trading: 2016 to 2019," CESifo Working Paper Series 8385, CESifo.
    6. Yin-Wong Cheung & Louisa Grimm & Frank Westermann, 2020. "The Evolution of Offshore Renminbi Trading: 2016 to 2019," IEER Working Papers 119, Institute of Empirical Economic Research, Osnabrueck University.
    7. Yin-Wong Cheung & Robert N McCauley & Chang Shu, 2019. "Geographic spread of currency trading: The renminbi and other EM currencies," GRU Working Paper Series GRU_2019_011, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    8. Angelo D'Andrea & Nicola Limodio, 2019. "High-Speed Internet, Financial Technology and Banking in Africa," BAFFI CAREFIN Working Papers 19124, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    9. Paulo Sergio Ceretta & Alexandre Silva Da costa, 2017. "The Gap Effect on the Brazilian Exchange," Economics Bulletin, AccessEcon, vol. 37(4), pages 2505-2516.

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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