Article1999

FX Spreads and Dealer Competition Across the 24-Hour Trading Day

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Financial Markets and Investment Strategies Monetary Policy and Economic Impact Banking stability, regulation, efficiency

Abstract

This study examines the impact of competition on bid-ask spreads in the spot foreign exchange market. We measure competition primarily by the number of dealers active in the market and find that bid-ask spreads decrease with an increase in competition, even after controlling for the effects of volatility. The expected level of competition is time varying, highly predictable, and displays a strong seasonal component that in part is induced by geographic concentration of business activity over the 24-hour trading day. Our estimates show that the expected addition of one more competing dealer lowers the average quoted spread by 1.7%

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References

1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1988Testing for a Unit Root in Time Series Regression 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1978THE SUPPLY OF DEALER SERVICES IN SECURITIES MARKETS 1994Is the Electronic Open Limit Order Book Inevitable?1983The Dynamics of Dealer Markets Under Competition 1978THE PRICING OF SECURITY DEALER SERVICES: AN EMPIRICAL STUDY OF NASDAQ STOCKS 1993A geographical model for the daily and weekly seasonal volatility in the foreign exchange market

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